Chartered Financial Analyst (CFA) Practice Exam Level 2

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What does a Bearish Steepening of the yield curve indicate?

LT rates are falling faster than ST rates
The gap between ST and LT rates is decreasing
LT rates rise more than ST rates
ST rates remain constant while LT rates fluctuate

The correct answer is: LT rates rise more than ST rates

A Bearish Steepening of the yield curve typically indicates that long-term (LT) interest rates are rising more than short-term (ST) interest rates. This can occur when market participants expect higher inflation or stronger economic growth in the future, leading them to demand higher yields for longer-dated securities. As a result, the yield curve steepens, meaning the difference between long-term and short-term rates increases, reflecting a bearish sentiment regarding future economic conditions. In this scenario, while short-term rates might be stable or experiencing smaller increases, the significant rise in long-term rates widens the gap between them, characterizing this steepening as “bearish.” This phenomenon can also be associated with expectations regarding monetary policy changes, where investors may anticipate that the central bank will eventually raise rates more aggressively in response to economic conditions.