I also stumbled on this on engine & content examples version 4.11 (binary release). It definitely seems like a bug in the blending system. Epic, is someone already looking at this?
The issue becomes even more pronounced by setting the active animation sequence of the characters to “Idle”. (Select the character → select the SkeletalMesh1 component → set “Anim to Play” to “Idle”)
Initially, the characters stand almost still. Moving the blend weight slider even slightly away from 0.0 immediately introduces a steady “jitter” cycle: all affected bones seem to alter between falling freely and snapping back toward an apparently correctly blended pose. On my computer, this cycle runs at around 2-3 times per second.
In my case the issue was resolved by turning off ‘bEnableUpdateRateOptimizations’ on the skeletalmeshcomponent. Apparently this optimization interferes with the physics blending, even when the camera is very close to the mesh.