How to Play a Steeper Yield Curve

During the tumultuous initial week of 2021, the “U.S. yield curve reached its steepest level in four years,” reported Bloomberg News. The ostensible cause was the buzz that the unified Congress will pass a larger COVID relief and stimulus package than we’d have gotten otherwise.

- Jeffrey R. Kosnett

Bond prices quickly sank. News-obsessed traders are known to shoot first and aim later, only to miss the target altogether. But the implication is that interest rates beyond one year’s maturity are now on an elevator. I do not buy this totally, and neither does the Federal Reserve, but markets are susceptible to mass psychology. So, what might this turn of events mean for your investments?

The steepness of the curve, if you need a refresher, relates to the difference between the yields on short-term credit—such as three-month Treasury bills, which influence your yield on cash and savings accounts—and a long-term benchmark such as the 10-year Treasury note. This spread closed January 8 at 1.05 percentage points, after a long spell at about half of that. As the curve steepens, economists smell rising inflation. Savers sense a chance to earn a better return. The stock market tends to rejoice at the idea that businesses can soon raise prices and the economy will grow faster.