The term structure of interest rates can provide investors with insights into future economic conditions. When analyzing the yield curve, a plot that displays the relationship between bond yields and their maturities, various shapes can indicate differing expectations about interest rates and economic activity.
A normal yield curve suggests that longer-term securities have higher yields than short-term ones, typically signaling a growing economy. In contrast, an inverted yield curve occurs when short-term interest rates are higher than long-term rates, often forecasting an economic recession. A flat yield curve, where yields do not differ much across maturities, can imply uncertainty in the economic outlook.
Given this context, which of the following scenarios most accurately reflects a flat yield curve?