yield curve and fiscal/monetary policy

Boy i’m having a hard time memorizing this and i don’t find it intuitive to understand, does anybody have any tricks or can anybody make me understand how this can stick? the only one i can rationalize is that if both monetary and fiscal policy are tightening then the yield curve will be inverted (desperate need to stop the spending.) What about the other three options?

The way I like to think about it, monetary focuses on short term while fiscal focuses on long term, and that long term has bigger swings. Expansive both=normal steep, expansive monetary restrictive fiscal=very steep, expansive monetary restrictive fiscal=flat, etc.

i’ve always thought of it as flat = conflicting signals from fiscal and monetary. fiscal is the long end of the curve, and when expansive, the govt crowds out (loanable funds scarce), so rates rise leading to upward slope.

remember mainly that if monetary policy is tight, the yield curve can never be rising. It’s either flat or inverted. If monetary policy is loose, the curve is going up, just a question of how much.

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I think downward (both restrictive) and severly upward (both expansionary) are pretty easy. I remember flat as “Mr. Flat”, where Mr. = Monetary Restrictive. Since monetary is restrictive, fiscal has to be expansionary. Then just flip them for slightly upward sloping.

wow all these are really great, mr. flat, love it! Thanks so much.

cfa volume 3 page 69 convenient little matrix breakdown…memorize it… seems like a great random eco question for the exam

i have a very simple way I use to re-create the 4 yield curve shapes in a 10 seconds anytime I want. I have used it dozens of times in meetings - with bond traders (who should know better), economists, fund managers - works a treat every time. if you take just 5 minutes to do this exercise a dozen times I guarantee you will remember it forever and be able to re-create it in literally 10 seconds anywhere you want - guaranteed to impress. Just think: “FINS”. FINS stands for Flat, Inverted, Normal, Steep. 1. draw a big plus sign (I mean BIG - take half the page or half the white board) - like the 4 FINS on a wheel or the fins on a propellor - or the 4 FINS on a BMW logo (which is actually a propellor because BMW first started making prop engines for planes in the war). This gives you the 4 quadrants of your matrix 2. in the 4 quadrants - starting from top left going clockwise - write the letters F I N S. (ie “F” in the top left, “I” in the top right, “N” in the bottom right, “S” in the bottom left) This whole thing is a giant wheel that goes clockwise around the economic cycles, so always think clockwise - always starting top left corner. (if you have an audience don’t actually write F-I-N-S - skip to step 3) 3. in the 4 quadrants - starting from top left going clockwise - draw the 4 curves - F-I-N-S - ie: Flat, Inverted, Normal, Steep. That puts your 4 yield curves in the 4 quadrants. 4. Now you have to specify Fiscal/Monetary and Loose/Tight. “F” comes before “M” in the alphabet, so write “Fiscal” on top of the page (above the Flat & Inverted curves, above the vertical Fin). Then write “Monetary” on the left side (left of the Steep & Flat curves, left of the horizontal Fin) 5. Now for the Loose/Tight bit. “L” comes before “T” in the alphabet, so just below Fiscal, write Loose and tight starting left to right - so write “Loose” above the Flat curve, and write “Tight” above the Ïnverted curve. 6. For Loose/tight on the Monetary side - always remember you are going clockwise around this circle, so you write Loose and Tight on the 2 curves on the left side as you as you go clockwise around them - ie “Loose” to the left of the Steep curve, and “Tight” to the left of the Flat curve as you move up around to 12 o’clock. That’s it - you now have the 4 quadrants (4 fins of the propellor), the 4 yield curves, and the correct labels for Fiscal & Monetary, Loose & TIght for both fiscal & monetary. This literally takes 2 seconds per step - after you’ve practiced a dozen times you will do it in 10 seconds flat - on any whiteboard, any meeting, anywhere. eg in the Boston practice exam q.38 in PM section) You can then go around the clock and write in at exactly what month/quarter each cycle turned in your country. You can get cute by making each yield curve into an arrow (always pointing left to right). So the shape of the yield curve is a predictor of economic growth in the future. It is also a predictor of stock markets because both yield curve and stock markets are leading indicators of economic growth. (Tip - in meetings don’t actually draw the arrow on each yield curve - just imagine it’s there - so you sound wise when using the curve as a pointer to future ec growth trends & stock market trends) Eg in the US, the curve flipped to Inverse in June 06 (30y Treasuries fell below the FF rate of 5.25), meaning the arrow was pointing down to the right (down into the future), so from mid 06 to late 07 the economy was booming, but the curve was pointing to negative ec growth (recession) in the future beyond the current phase. The contraction then started at 3 o’clock - on cue. Then in Dec 07 the US curved fllipped to Normal (FF at 4.25 dropped below 30y treas) - pointing to slow/moderate growth in the future (while the ec headed into recession - the yield curve looks beyond that) Then in early 09 the curved headed into Steep territory (eg now 30y treasuries have jumped form under 3% in Dec 08 to 4.5% now, while the FF is still 0%). So now with a Steep yield curve - the arrow is pointing to rapid ec growth ahead. - produced by super low rates at the short end (super loose monetary policy), and reflected by rising yields at the long end (super loose fiscal policy) The cycle doesn’t move around the clock at a constant speed - sometimes it moves quickly around to the next quadrant, other times it stays there for years becore moving to the next. btw - my FINS matrix looks slightly different from the matrix on p. 69 vol 3 of cfa text - they have the relationships correct but they put them in a different order - their’s doesn’t move around clockwise around a clock - mine does. OK so how does this all work - if you want to check the logic. There are 2 ends of the yield curve: the short and the long. The short end primarily reflects monetary policy, and the long primarily reflects fiscal (and the longer term impacts of monetary polciy. - If monetary policy is loose (cash rates low), the short end is low - If monetary policy is tight (cash rates high), the short end is high. - if Fiscal policy is loose (govt deficits, low tax receipts, high welfare), the long end is high with inflationary expecations in the future - if FIscal policy is tight (govt surpluses, high tax receipts, low welfare), the long end is low (low inflation) - Contraction starts at around 3 o’clock - Expansion starts at around 9 o’clock - you can also go around the clock and highlight when bond markets are expected to rise or fall and when stock markets are expected to rise and fall. For bond markets - this is easy - just the movement of the long end. Bond markets rise when the long end is falling. THey get killed when the long end rises. Use the cycle to shift duration along the curve on the basis of how the cycle is changing around the clock For stock markets - the yield curve and stock markets are both leading indicators of the real economy, so the direction of the arrow on the yield curve is a good pointer to stock market direction in the future. It’s a blunt (non-exact) instrument of course, but it’s a good guide to the big picture trends. You can check these out on your FINS matrix in your country to make sure. That’s it - you can re-create the matrix in 10 seconds flat - and you can use it to assess fiscal & monetary policy, predict the direction of the economy, predict the big picture direction of bond and stock markets, and point to when the curve changed in your country and why. spend 5 minutes learning it now and you will remember it forever. Just practice drawing 4 boxes with F-I-N-S in the boxes then put the M,F,L,T labels in the right places. You can scribble it anywhere for practice in a few spare seconds. Hope it comes up on the exam like it did on the Boston exam… cheers…


Okay Null, you can’t just start with “i have a very simple way” and then post a 100-page essay. You just can’t.

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spend 5 minutes learning it and it will be with you forever. If you are involved in the markets in any way you will use this for the rest of your life…

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Still making a difference 6 years later - thanks for this!

good news everyone!

I made this super simple…

Fiscal Expansionary, Monetary Contractionary = FEMc = Female = Vagina = Flat

All contractionary is downward sloping

With the help of null’s “FINS model” and some outside reading, I’ve come up with a very workable, common sense understanding of the four approaches. Here’s my take:

First, accept it as a given that monetary policy effects the short end of the curve and fiscal policy effects the long end of the curve. In reality, each could effect both, but for our purposes, this simplification will suffice. Consider also that the short end of the curve is directly associated with short-term cash rates while the long end of the curve is indirectly associated with long-term inflation expectations. When we come to understand all of this, the four scenarios easily fall into place. Beginning with the “steep” scenario:


When monetary and fiscal policy are both expansive, short-term rates are low due to monetary intervention and long-term rates are high due to increased inflation concerns, causing bond investors to demand higher yields over the long-term to offset lower long-term currency values.


When monetary policy is still expansive but fiscal policy becomes restrictive, inflation expectations ease, causing long-term rates to fall relative to the “steep” scenario. Since monetary policy is still loose, short-term rates are still low and we still have an upward sloping yield curve - it’s just not as steep as in the “steep” scenario.


When monetary policy and fiscal policy are both restrictive, short-term rates rise due to monetary intervention and long-term rates decline since inflation expectations are now nearly non-existent. Since bond investors know short-term rates will eventually have to fall to stimulate the economy, they are fine “locking in” long-term rates even though they are currently lower than short-term rates because their bet is that long-term rates today are still higher than the combination of short-term rates they’d be able to realize in the future.


When monetary policy is restrictive and fiscal policy is expansive, short-term rates are still relatively high but long-term rates have also now begun to increase due to renewed long-term inflation fears, resulting in a flat curve relative to the previous scenario.

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Hello there,

When a yield curve goes from steep given loose monetary & fiscal policies to normal (monetary loose, fiscal tight); how do you describe the change; is it flattening?

i think you go more specific. The long end is flattening. short rates remain unchanged.

yes flattening


You’re playing a dangerous game, friendo…

An amazing technique, thank you sir for posting it. I think it came extremely underrated, considering all the work you put it to write it.