Answer: 2-year rate Decrease; Short the 2-year and buy the 10-year

## Explanation A **bull flattening** occurs when both short-term and long-term interest rates decrease, but **long-term rates decrease more than short-term rates**. In this scenario: - **2-year rate**: Decreases (but less than the 10-year rate) - **10-year rate**: Decreases more significantly ### Trading Strategy Rationale: **Option A (Correct)**: "Short the 2-year and buy the 10-year" - **Short 2-year bonds**: When interest rates decrease, bond prices increase. By shorting the 2-year bonds, the trader profits if the 2-year bond prices decrease or increase less than expected. Since the 2-year rate decreases less than the 10-year rate, the 2-year bond price will increase less than the 10-year bond price. - **Buy 10-year bonds**: When the 10-year rate decreases more significantly, the 10-year bond price increases more substantially. This creates a profit from the long position. ### Why Other Options Are Incorrect: - **Option B**: "Buy the 2-year and short the 10-year" - This would profit from a bear steepening (short rates decrease more than long rates), which is the opposite of bull flattening. - **Option C**: "2-year rate Increase" - Incorrect because in bull flattening, both rates decrease, not increase. - **Option D**: "2-year rate Increase; Buy the 2-year and short the 10-year" - This would be appropriate for bear flattening, not bull flattening. ### Key Concept: In a bull flattening environment, the trader wants to be **long duration** (benefiting from falling rates) in the longer maturity bonds while being **short duration** in the shorter maturity bonds to capture the relative outperformance of long-term bonds.

Author: LeetQuiz .