A curve where short and long yields are nearly equal, usually seen late in a hiking cycle as the market prices the end of tightening.
Flatness is a transition state. The front end has already repriced to a high policy rate while the long end reflects a lower long-run average, so the two meet. It often precedes inversion.
A flat curve squeezes anyone earning a spread between short funding and long assets, and it removes the roll-down component of bond returns because moving down the curve no longer picks up yield.
Example: 2-year 4.35%, 10-year 4.38%. The 2s10s spread is 3 bp. A bond one year from now rolls to a yield essentially identical to today's, so all of the return is coupon.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
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