The level of the index increases as the yield curve steepens and decreases as the yield curve flattens. FLAT employs a strategy that seeks to make money when the two-year versus 10-year yield spread declines, taking a bearish short position on the underlying.
Simply put, FLAT performs when the the spread between two-year and 10-year yields declines, or “flattens,” by going long two-year note and taking a short position in the 10-year note.
The Treasury yield curve is typically upward sloping because investors would usually demand more interest for locking up their money over long periods, creating a steep yield curve. However, this elevated state can not last in the long term, which may open an opportunity to buy the ETN.
For more information on the fixed-income market, visit our bond ETFs category.