What can cause the yield curve to steepen?

The steepening of the yield curve occurs when the difference between short-term and long-term interest rates increases. One of the primary drivers of this steepening is rising inflation expectations and higher interest rates. When investors anticipate that inflation will rise, they expect central banks to increase interest rates to combat this inflation. As the market builds these expectations, yields on long-term bonds tend to increase more significantly than those on short-term bonds, resulting in a steeper yield curve.

Higher inflation expectations affect long-term bond yields by leading investors to demand a greater risk premium for holding bonds that they believe will yield lower real returns due to inflation erosion. This dynamic causes the spread between long-term and short-term rates to widen, effectively steepening the curve. Additionally, if short-term interest rates remain stable while long-term rates rise, the overall yield curve will reflect this steepening nature.

In contrast, increased demand for long-term bonds would likely lead to lower yields in that segment, flattening the curve. Decreased economic growth prospects typically translate to lower interest rates across the board, causing a flattening of the yield curve. Lastly, risk aversion in the stock market may lead to investor demand for bonds, but this does not necessarily translate to a steepening of