Trouble in visualising the yield curve flattening or steepening (business cycles)

CFA Level III
#1

Hi All,

I am having a bit of an issue to see how the yield curve will evolve over the business cycles. Can someone please help validate how this works ? Much appreciated if the examples below can be modified to reflect the essential meaning. Many thanks!

(No issue) Initial recovery: ST and LT rates bottoming
e.g. ST=2% and LT= 8%
Outcome: Yield curve steep

** (Issue) Early expansion**: ST rates increasing and and LT rates bottoming
e.g. ST= 4% and LT=??? (Does this mean LT goes higher again? to say 10%)
Outcome: Yield curve begins to flatten

** (Issue) Late expansion**: ST rates increasing and and LT rates increasing
e.g. ST= 6% and LT= ??? (Does this mean LT goes higher again from (Early expansion)? to say 14%)
Outcome: Yield curve begins to flatten
In this case i can’t really see the curve to flatten

** (Issue) Slowdown**: ST and LT rates peaking
e.g. ST= 7% and LT= ??? (Does this mean LT goes higher again from (Late expansion)? to say 15%)
Outcome: Yield curve begins to flatten or inverted
In this case again… i can’t really see the curve to flatten or inverted

** (Issue) Contraction**: ST and LT rates declining
e.g. ST= 5% and LT= ??? (Does this mean LT goes lower again from (Slowdown)? to say 12%)
Outcome: Yield curve begins to re-steepen

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#2

image
image279×706 3.97 KB

5 = contraction; 4 = slowdown; 1 = early expansion and so on…

Column on left = short term rates
Column on right = long term rates

(I hope the picture gets uploaded.)

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#3

One more thing - don’t read from Initial recovery to contraction.

Read in this sequence - Contraction to Slowdown

It will help the perspective. Contraction and slowdown have lot more interesting points than other three.

Slowdown to contraction has major step changes.
Contraction to slowdown has gradual changes.

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#4

Thanks a ton phil! Just on the last picture, how should i read the phase (1,5)?

#5

Minor change in the long term yield and more pronounced change in the short term yield. And yield curve is the steepest in step 5.

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