A type of interest rate swap in which the floating rate leg is derived from the difference between long and short-term interest rates, and hence this tool is often called a “curve steepener”. Steepeners used to be highly leveraged in their users’ quest to amplify returns, where the difference between long and short rates is usually multiplied by 10, 20, or even 50 times. An investor’s returns are positively proportionate to the difference between the two rates.
The steeper the curve, i.e., the greater the difference between long and short term rates, the higher the return earned by the holder. A flat curve means the holder receives no return, while continuing to pay a benchmark floating rate (such as LIBOR).
