Not all yield curves are flattening

In recent days, yield curve flattening has gained a lot of attention, all over the world. As the central banks around the world have been diving deeper into monetary easing, the expectations have gone up for lower for longer. In addition to that, a low inflation rate has led to the flattening too.

Since December 2013, the spread between 10-year and 2-year treasury has declined from 2.6 percent to just 0.8 percent. It has declined about 90 basis points in past one year. Some see this flattening as a derivative of the central banks’ policies, while others see it as a precursor of a looming inflation.

However, not all curves have been flattening.

The chart shows the spread between 12-month Libor (London Interbank offer rate) and 3-month LIBOR based on the U.S. dollar. The spread has been rising since the summer of 2014. It is up around 40 basis points since then. The spread has reached the highest level in more than six years. While treasury rates can be seen as risk-free rate the Libor is widely considered as the risk rate.

The spread is of extreme importance since trillion of dollars’ worth of interest rate derivatives are priced based on the Libor.