A high bond yield can attract a lot of investors towards the bond market. These are the investments which allow governments and corporations to lend money from investors for a specific period of time, at a fixed interest rate. If you don’t know but both bonds and the stock market are related to each other. However, it is an inverse trade relation since both compete for the capital.
Have you any idea about this?
If not then this article will help you to understand the relationship between the bond and the stock market. And what impact bond yield put on the stock market. So, without wasting any more time, let’s dig deep into it.
How Bond Yield affects the Stock Market?
Bond Yield influences the stock market in different ways in different circumstances. As you know the bonds are safer than stocks. But, bonds offer lower market returns. Thus explained when stocks go up, the bonds go down and vice-versa.
When the economy of a nation grows, money moves into the stock market. It is because when the economy is booming the consumers tend to buy more and companies receive good earnings thanks to higher demands among consumers. Investors feel more confident. In doing so, they want to beat inflation and the stock market is one way to do that. This further led to buying of more stocks and selling of bonds.
But, when the economy slows down, the consumers purchase less which led to a loss in corporate earnings and a decline in stock prices. In such circumstances, everybody looks for the guaranteed returns which cannot possible with stock investments. Thus, they go for bonds for more guaranteed returns.
But, that doesn’t mean there is an absolute inverse relation between bond yields and the stock market. There are periods in times when both stocks and bonds rise and fall at the same time. “Economic recoveries” is the cause of their simultaneous movements. In early economic recoveries when inflationary pressures are weak and central banks are obligated to low interest rates to trigger the economy. Until the economy starts to grow without the aid of monetary policies or interest rate decisions reach maximum levels where inflation becomes a threat, the bonds and stocks tend to go simultaneously.
Thus, investors and traders need to be aware of economic and financial market conditions to get the clear image of the evolving relationship between bond yields and the stock market. According to top financial advisors, a well-diversified portfolio made of stocks and bonds is the best investment strategy to get the great investment returns at the lowest risk.
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Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.