SI - Why the flattening yield curve is bad and what it means for banks
The U.S. Treasury yield curve is flattening to levels not seen since the deflationary shock at the onset of the COVID-19 pandemic, implying that the bond market (NASDAQ:TLT) (NASDAQ:SHY) (NASDAQ:IEF) (NYSEARCA:ZROZ) sees weaker economic growth and possibly recession risks if history serves as any guide. This comes as the Federal Reserve is expected to hike the policy rate to above neutral to tame inflationary pressures. Yield curve 101: The Treasury yield curve is the spread between two different interest rates tenors, say the difference between the 10-year UST yield and the 2-year. When the curve's slope is inverting (downward sloping), short-term bonds yield more than long-term ones, meaning investors are more optimistic for the months ahead than they are for the years ahead. Will flattening/inverting curve hurt banks' profitability? In practice, a flattening or inverting yield curve tends to hinder banks' net interest margins since they can only borrow money at
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Why the flattening yield curve is bad, and what it means for banks