when interest rates converge the yield curve flattens a flattening yield curve is defined as the narrowing of the yield spread between long and short term interest rates when this happens the price of the bond will change accordingly if the bond is a short term bond maturing in three years and the three year yield decreases the price of this bond will increase 
let s look at an example of a flattener let s say the treasury yields on a 2 year note and a 30 year bond are 1 1 and 3 6 respectively if the yield on the note falls to 0 9 and the yield on the bond decreases to 3 2 the yield on the longer term asset has a much bigger drop than the yield on the shorter term treasury this would narrow the yield spread from 250 basis points to 230 basis points you can chart these and other yields to create a yield curve in excel and other software a flattening yield curve can indicate economic weakness as it signals that inflation and interest rates are expected to stay low for a while markets expect little economic growth and the willingness of banks to lend is weak if the yield curve steepens this means that the spread between long and short term interest rates widens in other words the yields on long term bonds are rising faster than yields on short term bonds or short term bond yields are falling as long term bond yields are rising therefore long term bond prices will decrease relative to short term bonds steepening yields are a true risk for bond traders who use a roll down return strategy to profit from selling long term bonds they hold a steepening curve typically indicates stronger economic activity and rising inflation expectations and thus higher interest rates when the yield curve is steep banks are able to borrow money at lower interest rates and lend at higher interest rates an example of a steepening yield curve can be seen in a 2 year note with a 1 5 yield and a 20 year bond with a 3 5 yield if after a month both treasury yields increase to 1 55 and 3 65 respectively the spread increases to 210 basis points from 200 basis points on rare occasions the yield on short term bonds is higher than the yield on long term bonds when this happens the curve becomes inverted an inverted yield curve indicates that investors will tolerate low rates now if they believe rates are going to fall even lower later on so investors expect lower inflation rates and interest rates in the future 