What are the short-term effects during the slowdown phase of the economic cycle?

During the slowdown phase of the economic cycle, it is common for bonds to begin to rally. This occurs because, as economic conditions worsen, investors tend to seek safer, more stable investment vehicles such as bonds. An increased demand for bonds typically leads to higher bond prices.

When there is a slowdown, the expectation is that the central bank may lower interest rates to stimulate the economy. As interest rates decline, existing bonds with higher yields become more attractive, pushing up their prices. Investors often prefer the relative safety of bonds compared to equities during periods of economic uncertainty, which contributes further to the rally in bond prices.

In contrast, the other options present scenarios that do not align with the typical behavior of markets during a slowdown. For instance, in a slowdown, short rates generally decrease rather than increase, stock prices often decline due to lower economic growth expectations, and the yield curve may flatten rather than steepen, as short-term rates decline faster than long-term rates.