Curve Flattener
A curve flattener is a fixed income trade that profits from a narrowing of the yield spread between a longer-maturity and a shorter-maturity Treasury, typically implemented by being short the short end and long the long end of the yield curve in a duration-weighted structure.
A flattener is the directional opposite of a steepener: it profits when the yield spread between a long-maturity and short-maturity Treasury narrows. This can occur because the long end rises while the short end rises faster (a bear flattener), or because both yields fall but the long end falls faster (a bull flattener), or because the short end rises while the long end stays flat or falls.
A bull flattener is one of the most observed curve patterns in economic cycle history. As the economy slows and the Federal Reserve is expected to cut rates, short-term yields decline rapidly in anticipation of Fed easing, while long-term yields fall more slowly since long-term inflation expectations and term premiums change gradually. The result is a flattening of the curve, with the 2-year yield dropping faster than the 10-year.
A bear flattener, by contrast, occurs when the Federal Reserve is actively hiking rates to combat inflation. Short-term yields rise sharply in response to policy rate increases, while long-term yields may rise less — or even decline if the market believes aggressive tightening will slow the economy and reduce long-run inflation. The 2018-2019 Fed tightening cycle produced a classic bear flattener, ultimately inverting the 2s10s curve in 2019.
Implementation of a flattener mirrors the steepener in construction: long the long end, short the short end, sized so that DV01 is matched. A common expression is being long 10-year Treasury futures and short 2-year futures in a DV01-neutral ratio. Because the 2-year has much lower duration, the notional short in 2-year futures must be much larger than the notional long in 10-year futures to achieve duration neutrality.
Flatteners are sometimes implemented using interest rate swap spreads rather than outright Treasury positions, allowing traders to separately express views on the curve slope independently of Treasury-swap spread dynamics. Flattener trades also appear as components of more complex structured positions, such as a carry trade where the higher yield on a short-duration portfolio is combined with a flattener overlay to reduce the duration exposure of the overall position. The risk in a flattener is the curve steepening — particularly a bear steepener driven by rising long-end yields — which would produce mark-to-market losses in the long end of the position.