3. Yield Curve Flatter, Not Steeper in 2014? In 2013, perceived economic well-being coupled with the Fed signaling an intent to slow its asset purchases sent 10-year and 30-year U.S. bonds down much faster than shorter-term bonds (e.g., one-year, five-year, etc.). This could be seen in a steeper yield curve. Some also profited from the trend via iPath Treasury Steepener (STPP).
In 2014, however, a different picture may be developing. Money has been slowly creeping back into assets on both the long end of the yield curve as well rates-sensitive real estate investment trusts.
In contrast, demand for the shortest end of the Treasury curve (e.g., one to three years) has been neutral at best. The consequence? The yield curve is stabilizing and may ultimately flatten as the year progresses; in other words, yields on shorter-term bonds may rise while yields on longer-term bonds run in place. Year-to-date, iPath Treasury Flattener ETN (FLAT) may be signaling a changing of the guard.
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