Interpreting Steepeners and Flatteners

Steepeners and flatteners are curve bets, not duration bets. You're wagering on how the gap between short and long rates will change, not whether rates go up or down overall. During the 2013 Taper Tantrum, the 2s10s spread widened by 100+ basis points as the 10-year surged from 2% to 3% while short rates stayed anchored (Federal Reserve Bank of St. Louis, 2021). Traders positioned for steepening captured that spread move; those hedged for parallel shifts missed it entirely. The practical edge isn't predicting rate levels. It's reading which part of the curve will move more.

What Steepeners and Flatteners Actually Mean (The Core Distinction)

A steepener profits when the yield curve gets steeper (when long rates rise relative to short rates, or short rates fall relative to long rates). A flattener profits when the curve gets flatter (long rates fall relative to short rates, or short rates rise relative to long rates).

The visual:

• Steepening: 2-year yield stays at 3.50%, 10-year yield rises to 4.50%. Spread widens from 50 bps to 100 bps.
• Flattening: 2-year yield rises to 4.00%, 10-year stays at 4.25%. Spread narrows from 75 bps to 25 bps.

The causal chain for steepeners: Fed cuts expected (or holding while economy recovers) -> Short rates fall/stay anchored -> Long rates reflect growth/inflation -> Curve steepens

The causal chain for flatteners: Fed hikes expected (or aggressive tightening) -> Short rates rise -> Long rates capped by recession fears -> Curve flattens (or inverts)

Why this matters: Between July 2022 and September 2024, the 2s10s spread went from slightly positive to -100 basis points at its most inverted (the deepest inversion in decades), then normalized back to positive as the Fed pivoted. Flattener trades captured the first move; steepener trades captured the normalization.

The DV01-Neutral Trade Construction (How Professionals Do It)

A pure curve trade isolates spread movement from parallel rate moves. You do this by making the position DV01-neutral: the dollar gains from one leg offset the dollar losses from the other when rates move in lockstep.

The setup for a steepener:

• Long 2-year futures (or bonds): profit if 2-year yields fall
• Short 10-year futures (or bonds): profit if 10-year yields rise
• Sized so the DV01 of each leg is equal

DV01 reference values (per $1 million par):

Source: CME Group, 2024

Worked Example: 2s10s Steepener

You want to put on a $1 million notional steepener betting the 2s10s spread will widen.

Step 1: Equalize the DV01

10-year DV01: $850 per $1M 2-year DV01: $185 per $1M

Ratio = 850 / 185 = 4.59

For every 10-year contract you sell, you need approximately 4.6 2-year contracts on the long side to be DV01-neutral.

Step 2: Size the trade

CME Treasury futures contract sizes:

• 2-year note futures: $200,000 face value, DV01 ~$37 per contract
• 10-year note futures: $100,000 face value, DV01 ~$85 per contract

To construct a DV01-neutral steepener:

• Sell 10 10-year contracts (DV01 = 10 x $85 = $850)
• Buy 19 2-year contracts (DV01 = 19 x $37 = $703, close to neutral)

Step 3: Calculate the P&L

Scenario A: Curve steepens (your bet)

• 2-year yield falls 25 bps
• 10-year yield rises 30 bps

2-year leg: +19 contracts x $37 x 25 = +$17,575 10-year leg: +10 contracts x $85 x 30 = +$25,500 Net P&L: +$43,075

Scenario B: Parallel shift up 50 bps (no spread change) 2-year leg: -19 x $37 x 50 = -$35,150 10-year leg: +10 x $85 x 50 = +$42,500 Net P&L: +$7,350 (small positive due to imperfect DV01 match)

Scenario C: Curve flattens (against you)

• 2-year yield rises 30 bps
• 10-year yield falls 20 bps

2-year leg: -19 x $37 x 30 = -$21,090 10-year leg: -10 x $85 x 20 = -$17,000 Net P&L: -$38,090

The point is: You profit when the spread moves your way, regardless of the direction of rates overall. The DV01-neutral construction filters out the parallel shift component.

Bull Steepeners vs. Bear Steepeners (The Directionality)

Not all steepening is the same. The driver matters for what else happens in your portfolio.

Bull Steepener:

• Short rates fall faster than long rates (or long rates stay flat)
• Usually happens: Fed cutting, early recovery
• Equity correlation: Often positive (risk-on)
• Example: Late 2024 as Fed began cutting

Bear Steepener:

• Long rates rise faster than short rates (or short rates stay flat)
• Usually happens: Inflation fears, supply shocks, fiscal concerns
• Equity correlation: Often negative (risk-off)
• Example: 2013 Taper Tantrum when 10-year yields surged 150 bps while 2-year barely moved

The durable lesson: A steepener trade profits in both scenarios, but your broader portfolio behaves very differently. Bull steepeners feel good (stocks up, bonds recovering). Bear steepeners feel bad (stocks wobbly, everyone worried about fiscal sustainability). Know which regime you're in.

Historical Patterns: When Curves Steepen vs. Flatten

Flattening tends to occur during:

• Fed hiking cycles (short rates catch up to long rates)
• Late-cycle conditions when growth expectations fall
• Flight-to-quality episodes that compress long yields

2022-2023 Fed hiking cycle: Fed funds rose from 0.25% to 5.50% (+525 bps in 16 months). The 2-year yield tracked Fed funds higher, but the 10-year lagged as recession fears capped long rates. Result: curve inverted to nearly -100 bps.

Steepening tends to occur during:

• Fed cutting cycles (short rates fall)
• Recovery phases (long rates reflect growth optimism)
• Inflation scares that push up long rates while Fed is on hold

2013 Taper Tantrum: Bernanke hinted at QE tapering on May 22, 2013. The 10-year yield jumped from ~2.0% to ~3.0% (+100 bps in 10 weeks), while short rates stayed anchored near zero. Result: 2s5s steepened first (May-July), then 5s10s followed. Traders who anticipated the steepening sequence profited on both legs.

The practical point: Steepeners work when the Fed is dovish or the market fears inflation. Flatteners work when the Fed is hawkish or recession fears dominate. Your macro view drives the trade selection.

Flattener Trade Mechanics

The flattener is the mirror image of the steepener:

• Short 2-year futures (profit if 2-year yields rise)
• Long 10-year futures (profit if 10-year yields fall)
• Sized to be DV01-neutral

When flatteners win:

• Fed tightening faster than expected
• Front-end yields repricing higher
• Long end anchored by growth fears

Worked example outcome: If you put on a 2s10s flattener in early 2022 (buying 10-year, shorting 2-year) and held through the inversion, you captured 100+ bps of spread narrowing. On $10 million notional DV01, that's approximately $100,000 in P&L just from the spread move.

Detection Signals: Which Trade Fits Your View

You're likely a steepener candidate if:

• You expect the Fed to cut rates (or stay on hold while inflation picks up)
• You think long rates don't fully reflect future growth or inflation
• You see the current inversion as unsustainable
• You want to profit from curve normalization

You're likely a flattener candidate if:

• You expect the Fed to hike (or stay higher for longer)
• You think short rates don't fully reflect Fed hawkishness
• You see recession risk capping long yields
• You want to profit from continued inversion or flattening

The test: Can you articulate what needs to happen at each end of the curve? If you only have a view on one maturity, you're making a duration bet, not a curve bet.

Common Mistakes in Curve Trading

Mistake 1: Ignoring the carry

Steepeners and flatteners have embedded carry. When the curve is inverted, the steepener has positive carry (you're long the higher-yielding short end, short the lower-yielding long end). When the curve is steep, the flattener has positive carry. Factor this into your holding period analysis.

Mistake 2: Imperfect DV01 matching

Using rounded contract counts creates residual duration exposure. In the example above, the 2-year leg DV01 was $703 vs. $850 for the 10-year leg. This $147 gap means you're still slightly long duration overall. Precision matters if rates move sharply.

Mistake 3: Ignoring intermediate maturities

The 2s10s trade captures only part of curve dynamics. During the Taper Tantrum, 2s5s moved first, then 5s10s. A pure 2s10s trade missed the initial 2s5s steepening. Consider butterfly trades (2s5s10s) for more granular curve exposure.

Mistake 4: Static positioning

Curve dynamics evolve. After the initial steepening move, the market may price in the new equilibrium. Holding too long exposes you to mean reversion. Set spread targets, not just entry levels.

Steepener/Flattener Checklist

Essential (high ROI)

• Verify your trade is DV01-neutral (to avoid accidental duration bets)
• Know whether you're positioned for a bull or bear curve move
• Set a spread target (in bps) where you'll take profit
• Understand the carry: positive or negative?

High-impact (workflow integration)

• Monitor Fed funds futures for front-end rate expectations
• Track 2s10s spread daily (FRED has free data)
• Stress test for scenarios where both ends move against you (e.g., parallel shift plus flattening)

Optional (for active traders)

• Layer 2s5s and 5s10s separately to capture segment moves
• Use options on curve spreads for defined-risk expressions
• Combine with key rate duration analysis for portfolio hedging

Your Next Step

Check the current 2s10s spread (currently around +8 bps, barely positive after the historic inversion ended in late 2024). The long-term average is roughly +80 bps since 1977. Ask yourself: does the current spread reflect the macro environment, or is there further normalization to come? If you believe the spread should widen toward the historical average, a steepener makes sense. If you think the flat curve persists (Fed holding higher for longer), stay neutral or position for further flattening. Your macro view determines the trade.

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Related: Key Rate Duration to Measure Curve Risk | Barbell vs. Bullet Strategies Under Curve Shifts | Using Futures and Swaps to Adjust Duration | Understanding Treasury Yield Curve Shapes