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Bull steepening and bear flattening have the common belief that in bad news, treasuries catch a bid and short end rallies more because most bad news are short lived. In good news, treasuries sell off and investors are more comfortable holding longer duration treasuries.

What about the opposite? What are the economic intuitions behind the scenarios of bull flattening and bear steepening?

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Curves have had a strong tendency to bull flatten or bear steepen in recent years, and the reason is quite simple – the front end is anchored by Fed policies and can't move much (if at all). In fact, throughout 2010 to mid 2015, most traders don't even look at 2s/10s or 2s/30s curves, because these are perfectly corrected with 10s or 30s (since 2s can't move).

Conversely when the Fed is active, curves are more likely to bear flatten/bull steepen, simply because the front end of the curve is more volatile.

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  • $\begingroup$ Can you please elaborate how does Fed control 2yr? Is it through their direct intervention in the Fed fund rate which spills to the 2yr bills? $\endgroup$ – A1122 Aug 27 '16 at 6:19
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    $\begingroup$ They don't control 2yr, but can signal the path of future short-term interest rates. Recall that 2yr bond yield is basically the average market expectation for short rates over the next 2 years (+ term premium). In 2013-2014, for example, the Fed used forward guidance, signaling to the market that they wouldn't raise rates for the foreseeable futures. $\endgroup$ – Helin Aug 27 '16 at 6:25
  • $\begingroup$ Thanks. I'm also thinking about smaller cash/future curve pieces, for example ZN/10yr curve. This curve piece has about 3.5 yrs (10yr - 6.5yr ). I have noticed that in the past few months we have gotten quite a lot of bull flatteners in the > 5yr curve pieces. What might that be due to? $\endgroup$ – A1122 Aug 27 '16 at 6:38
  • $\begingroup$ Add: It happens a lot during European market hours. $\endgroup$ – A1122 Aug 27 '16 at 6:44

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