Can someone give a better description of all the implications being a flattening yield curve…here is what I know:
- if the level of the curve rises, all rates have increases and bond prices would be declining
- if the yield curve flattens, that’s a change in shape so the level doesn’t change (?) and it means that rates are declining so calls would gain in value??
- I know that a normal, healthy economy has an upward sloping yield curve so flattening is a bad sign right? I don’t really know exactly why though…
Some one correct me if im wrong:
if yield curve flattens, this is not a good sign and people expect economic growth and inflation in the future will be lower, so future interest rate would also below. Lower interest rate means higher bond price due to convexity and call option embedded in the bond is more valuable when the asset increase in value, since V callable = V Straight bond - V call ( investor is shot the call option), the value of callable bond actually would decrease, because it is more likely to be called back by the issuer.
Normal yield curve should be upward sloping because it is normal for longer maturity bond to have a higher yield than shorter maturity bond. If long maturity yield is low then it means investors are buying into these bonds pushing up the price and result in decreasing yield, and only when market is performing poorly or confident is low investor would invest into these safe heaven. for example, whenever the market have a big sell off or some big negative news happened, we usually see the 10 year US treasury yield goes down because money flow into the note.
if u have access to bloomberg or sth u can go compare the US yield curve and the Japan yield curve, then u ll see the japanese yield curve is really flat in comparision, and this reflect the reality of low GDP growth and nearly non existing inflation in Japan.
Again, some one correct me if im wrong. Thanks. 
I would also add that a flattening yield curve is more the consequence of expectations of a recession and not the other way around. If we expect a recession, we know that the central banks around the world are going to lower the short term interest rate to try to boost back the economy. So if we expect a recession, we want to buy long term treasuries now so that when interest rates do come down, we make a big fat capital gain on the bond while all the other fools lose money in the stock market. Now, if a lot of investors thinks this way, long term treasuries prices will come up, yields come down and the yield curve will tend to be flat.