03 Apr 2021
Why does the US treasury yields decrease though the interest rate increased? Thought it bond yields move opposite in direction to interest rates?
Curious question -
Saw this extract from investopedia:
Can anyone explain why the yields decrease even though interest rates is increased? Thought if interest rate rise, price will drop and hence yield rises?
Here are my thoughts, bearing in mind I have never studied economics in my life. I'm only answering this question because it's a question I'm interested in and I wanted to take a stab at it. Take my words with a pinch of salt.
Saw the following from investopedia too, in an article on Federal Fund Rates:
"Investors keep a close watch on the federal funds rate, too. The stock market typically reacts very strongly to changes in the target rate. For example, even a small decline in the rate can prompt the market to leap higher as the borrowing costs for companies gets lower."
In the above example, the Fed lowers rates, leading to increased borrowing followed by a rally in the stock market.
Just a stab in the dark - I'm guessing that if the Fed raises rates, it may conversely discourage businesses and companies in general from making big moves and borrowing large sums of money. This could cause the market to stagnate, drawing investors away from the stock market. If they flock to T-bills, notes and bonds to seek safety, the increased demand for T-bills then decreases their yields.
I think it's an altogether different concept from other types of bonds. Need to distinguish between the various types of bonds like treasury bonds, municipal bonds, corporate bonds. T-bills and corporate bonds are two different types of debt instruments that react slightly differently to interest rate adjustments. Bear in mind that corporate bonds, for example, are an instrument people invest in regularly as part of their portfolios while T-bills are seen as "safe-havens" in economic downturns/times of uncertainty. Accordingly, their relationships to Fed rates will vary.
As you've already pointed out, normal bonds would become less attractive in a higher interest rate environment, causing their prices to fall so that the yield can rise, commensurate with the existing interest rate climate.
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