What is a characteristic of a flat yield curve?

A flat yield curve is characterized by short-term and long-term interest rates being very similar or aligned, which is why the first choice is the correct answer. When the yields for various maturities, such as 2-year and 10-year bonds, are approximately equal, it indicates that investors expect little difference in the interest rate risk over different time horizons. This situation often arises when there is uncertainty in the economic outlook or when investors are expecting a slowdown or potential recession, leading to a flattened curve as they seek safety in longer-term securities, adjusting their expectations for future interest rates.

In contrast, other characteristics mentioned in the other options do not accurately describe a flat yield curve. For example, having consistently higher short-term yields would indicate a steep yield curve, where short-term rates rise above long-term rates. Long-term yields constantly decreasing suggests an inverted yield curve, typically associated with a significant downturn in economic conditions. Lastly, while a flat yield curve can indicate market uncertainty, it does not inherently signify market instability; rather, it reflects a specific expectation from the market regarding future interest rates and economic growth.