Chartered Financial Analyst (CFA) Practice Exam Level 2

Question: 1 / 400

In the context of yield curves, what does bullish flattening indicate?

LT rates rise more than ST rates

LT rates fall more than ST rates

Bullish flattening refers to a scenario where long-term interest rates decrease at a faster rate than short-term interest rates, leading to a reduction in the steepness of the yield curve. When investors expect economic growth and lower rates, they are likely to buy long-term bonds, pushing their prices up and yields down. At the same time, short-term rates might remain stable or decline only gradually, resulting in long-term rates falling more significantly. This dynamic suggests that the market anticipates a positive economic outlook, but with caution concerning short-term rates, which usually reflect current monetary policy and immediate economic conditions. Thus, in instances of bullish flattening, the overall yield curve indicates a market consensus of steady or improving future economic conditions despite a retreat in longer-term rates relative to shorter ones.

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Higher spread between ST and LT rates

Increasing gap between ST rates

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