the flat yield curve is a yield curve with little difference between short term and long term rates for bonds of the same credit quality typically treasurys this flattening of what is by definition usually a curve is often seen during transitions between normal and inverted curves a normal yield curve slopes upward 1
understanding the flat yield curvea flat yield curve means investors get about the same return on short term investments as long term ones when short and long term bonds offer very similar yields there is usually little benefit in holding the longer term instrument the investor does not gain any more returns for the risk or opportunity costs of holding longer term securities 2for example a flat yield curve on u s treasury bonds is one in which the yield on a two year bond is 5 and the yield on a 30 year bond is 5 1 a flattening yield curve may result from long term interest rates falling more than short term interest rates or short term rates increasing more than long term rates a flat yield curve typically indicates that investors are worried about the macroeconomic outlook one reason the yield curve may flatten is that market participants expect inflation to decrease or the federal reserve to raise the federal funds rate soon for example if the federal reserve increases its short term target over a specified period long term interest rates may remain stable or rise however short term interest rates would rise so the yield curve s slope would flatten as short term rates increase more than long term rates this occurred for instance as the federal reserve increased rates rapidly from 2022 to 2023 to combat pandemic era inflation 3flat yield curves are associated with economic uncertainty and hint that a slowdown could be around the corner federal reserve s impact on the yield curvethe federal reserve influences the cost of borrowing and as a result the economy s direction through the federal funds rate changing this rate at which banks lend to each other overnight usually affects other interest rates and the general cost of borrowing 4an increase in the federal fund rate raises short term interest rates but doesn t necessarily have the same impact on long term interest rates sometimes both rates will move up other times only short term rates will rise leading to a flattening yield curve this is more common when the market expects a short period of interest rate rises followed by a move to cut them as the economy contracts 5movements in the federal reserve s fund rate influence the cost to borrow money particularly in the short term 