Pull the levers. Watch the curve move.
Central banks set the front end. Deficits and QE fight over the long end. The shape that falls out of that argument decides what every asset on earth is worth. Most people learn this from a paragraph in a textbook. Learn it by breaking it instead.
Then try the quiz at the bottom, because “bull steepener” is the sort of phrase you want to have said out loud before someone asks you to define it.
The curve you just built
Yield by maturity. The faint line is where you started, so you can see the shape change.
10-year
4.24%
2s10s
+41bp
Real 10-year
1.74%
Starting curve
A normal upward-sloping curve: you get paid more to lend for longer. Move a lever and watch what happens to the shape.
The levers
What the central bank sets. Owns the front end. Zero is ZIRP; 20 is Volcker in 1981.
Central-bank net purchases. Positive is QE, negative is QT. The Fed bought roughly $4.6tn in 2020-21.
Government borrowing as a share of GDP. More paper, more term premium. 2020 ran near 15%.
What the market thinks inflation averages from here. Negative is deflation; 15 is the 1970s.
Drives the neutral real rate the front end converges to. Deep recession to China-in-2005.
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Who wants which asset now
Rates are a relative-price machine. Move them and you have moved the demand for everything else.
Long-duration bonds (30Y)
Little changedLong yields down, so prices up. The longer the bond, the bigger the move.
Equities (long-duration growth)
Little changedGrowth stocks are long-duration assets. Their value sits in distant cash flows, so the 10-year discount rate hits them hardest.
Credit (IG spreads)
Little changedCentral-bank buying crowds private money out of governments and into credit, which tightens spreads.
Gold and real assets
Little changedGold trades off real yields, not nominal. Your real 10-year here is 1.74%.
Name that curve move
0/0 correct
Four shapes, and interviewers ask for them by name. Read the scenario, pick the move.
The Treasury announces a large increase in long-dated issuance to fund a widening deficit. The central bank holds the policy rate flat.
This is a teaching model, not a pricing model. Yields here are the expected average short rate over each tenor plus a term premium that responds to issuance, central-bank purchases and inflation uncertainty. Real curves also carry convexity, swap spreads, foreign demand and the small matter of what everyone else is positioned for. For where rates actually are today, see the Macro Chartbook.
Where this shows up in interviews
- Valuation. Raise the 10-year 100bp and a growth company loses far more value than a mature one, because its cash flows sit further out. That is the whole argument about duration in equities.
- Leveraged finance. The front end is what floating-rate debt actually costs. Move it and you have moved every LBO model’s interest coverage.
- Macro conversation. When someone asks what you make of the curve, the answer they want names the move, names the driver, and says what it implies. Three sentences.
You can explain the curve. Can you defend the call?
A discovery session finds the gap between knowing the mechanism and holding a view under pressure. The bootcamps close it.