Business Cycle and Yield curve

Which phase of the business cycle is most likely to see a flattening yield curve?

Early expansion or late expansion.

Based on my understanding it is a late expansion.
But answers says early expansion.

Greetings friend! In answer to your question, here’s my understanding for what it’s worth:

The yield curve is basically flattening starting through early expansion phase all the way through late expansion to the slowdown phase, where the yield curve may actually invert. The yield curve is generally steepest at the end of the contraction phase and beginning of the initial recovery phase… and then begins to flatten starting in the early expansion stage and continuing through late expansion all the way to the point of possible inversion during the slowdown phase.

I believe the idea behind the question’s answer, that you described above, is the marked difference between the initial recovery stage and the early expansion stage. During initial recovery, the yield curve is steep. It begins to flatten in early expansion. So this is the point where you’re definitely seeing flattening of the yield curve - it marks the transition between recovery and expansion.

The logic behind it is partially explained by what the government is doing with short-term interest rates. Governments generally make their monetary policy with tweaks to short-term interest rates (called “policy rates”). When governments need recovery, they reduce short term interest rates to promote business. Short-term rates are less than long-term rates therefore, and the yield curve is steeper. When the economy gets too hot and inflation is high, governments will raise short-term interest rates to try to cool inflation down etc. So short-term rates will get closer in level to longer-term rates and this is why the curve flattens during the 2 expansion phases.

Cheers - good luck - you got this :+1:

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I agree with every point you mentioned: Here is a contradictory statement, " At early expansion + output gap, LT-ST= decreasing so curve has to steeper."

Greetings again friend! If LT-ST (I assume we are talking about subtraction here and looking at the difference between then two) is decreasing then by definition the curve is flattening, and not steepening. The difference between rates at either end of the curve is decreasing and flattening out.

When LT-ST is increasing, not decreasing, the yield curve is steepening. I would just focus on this logic and not worry about what may have been written that’s causing potential confusion (and seemingly mistaken by the author).

Cheers - good luck - you got this👍

Can someone make a summary about the YC in all of the business cycle (Inicital recovery, early expansion, late expansion, slowdown, recesion)

From my understanding:

  • initial recovery: low, maybe decreasing
  • early expansion: Flat or rising
  • late expansion: Flat or rising (more flat)
  • Slowdown:Short-term interest rates are high, perhaps still rising, but likely to peak.
  • recession: Stepeness curve

Is this okey?