Explanation

Correct Answer: B

Bearish flattening occurs when:

• Short-term rates rise more than long-term rates
• This typically happens when central banks tighten monetary policy to control inflation
• The yield curve flattens but the overall level of rates increases (bearish)

Why this scenario fits:

• During economic expansion, central banks raise benchmark rates (short-term rates)
• Long-term rates may also rise but typically less than short-term rates
• This causes the yield curve to flatten while overall rates are rising

Why other options are incorrect:

• Option A (Bullish flattening): Occurs when long-term rates fall more than short-term rates, typically in economic slowdowns
• Option C (Bearish steepening): Occurs when long-term rates rise more than short-term rates, which is less common in monetary tightening scenarios