Explanation
Correct Answer: A
Flight to quality refers to investors moving from risky assets to safe-haven assets, typically government bonds. This causes:
- Long-term rates fall more than short-term rates: Investors bid up prices of long-term government bonds, driving down long-term yields
- Yield curve flattens: The spread between long-term and short-term rates narrows
- Overall rates decrease: This is a bullish environment for bonds
Why other options are incorrect:
- Option B (Bearish flattening): Involves rising rates overall, which contradicts the flight to quality scenario
- Option C (Bullish steepening): Would require short-term rates falling more than long-term rates, which is less typical in flight to quality situations
