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19 September 2021
13:13 hour

: Bond investors may be overreacting to U.S. inflation report for August, analysts say

Market Watch

14/09/2021 - 20:11

Investors appear to be "underestimating the likely strength of price pressures there further down the line," says Oliver Jones of Capital Economics.


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  47. Bond Report: Treasury yields extend slide as investors gear up for Powell testimony and big week for earnings, data (12/07/2021 - Market Watch)
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  48. What does falling bond yields mean for a market correction? (20/07/2021 - Reddit Stocks)
    Hi there. I had a couple thought about bond yields, and was hoping someone could confirm/correct me on this thinking. Bond yields are falling, and have been steadily falling for years. Accelerated decline in yields demonstrates increased demand. People with a brain of their own (as opposed to brain from financial press) know inflation is coming. Bonds do poorly compared to stocks in inflationary periods because their payouts are locked for the buyer based on the price/yield when they buy. Stocks tend to do better in inflationary periods because they maintain their purchase (selling) power. Conclusion: Smart big money investors are fleeing to bonds to hedge against a market correction/collapse, that they expect to come before inflation really starts kicking us in the ass. With inflation coming quickly, the correction should be expected in the very short term. Thoughts?   submitted by   /u/sometimesikillplants [link]   [comments]
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  49. What bond yields tell us about the state of the economy. (16/04/2021 - Reddit Stocks)
    [Disclaimer: I'm new to this but do have a small background in economics. I posted this as a comment to another user in the daily thread, but since I put some effort into it and think it's a valuable write-up, I decided to make a thread. If anything is off, please go ahead and correct me. I do believe that the bulk of what I'm saying is accurate.] ​ My understanding is that rates (bond yields) go up when the economy is in good shape. That's because people are more confident in equities and they sell off bonds (less demand = lower prices = higher yields). When the economy is in bad shape, people go back to bonds because they're a safer alternative to stocks. People don't trust in the stock market's ability to perform and flock to bonds to give them fixed income and a safer place to park their capital. More demand for bonds = higher bond prices = lower yields. Short answer for why bond yields and prices are inversely correlated: say you have a bond that's worth $1000 face value and has a 2% yield. If demand for bonds has gone down and you must now sell that bond on the secondary market for, say, $800, then the yield has increased. Why? Because the buyer is paying less money for the same fixed return. Less money for the same fixed return = higher overall yield. And vice versa. I encourage everyone to look this up if you're not clear on it. Apart from that, right now is a weird time. Bond rates went up recently, and people were saying that was a bad sign for the markets. That's because people were saying it was related to inflation. Imagine: if inflation is going up, bonds with their current 1-2% yields (and negative real yields) are a horrible place to park your cash. You're actually losing money already due to negative real yields, but if inflation spikes 1-3% you're actually losing even more. Remember, bond yields are fixed so inflation eats into their nominal (fixed) yields. The theory was that economic stimulus plus dovish Fed policy (low interest rates, easy money) made people fearful that inflation was just around the corner. Thus, they began to sell off their bonds. Remember, less demand for bonds = lower prices = higher yields. If this were indeed the motivation for the bond sell-off, it's actually a negative indicator for the economy. It means we expect inflation to come. It means the Fed will be forced to raise interest rates to contain inflation (more expensive to borrow money). It means that future earnings will be worth less (value of dollars in the future goes down). This is why tech stocks sank at the same time bond yields went up: A. because they depend on easy capital (low interest rates) to expand their operations, and B. their valuation at the moment is highly linked to their future earnings. However, Jay Powell and the Fed came out and said any inflation would just be transitory, and the market seemed to believe it. The bond sell-off was contained. Furthermore, analysts were saying, like I said in the first half of my post, that rising bond yields is actually positive for the economy. So basically the fears about inflation got buried and we're back to a "normal" scenario where rising bond yields are seen as a positive sign for the markets. I'm not sure why bond yields went down today, but a quick Google search said that higher yields have attracted some investors (including overseas investors) back in. I'm new to this but it was good for me to make sure I understand it and try to explain it. Anyone who reads this can feel free to correct anything that is wrong.   submitted by   /u/shortyafter [link]   [comments]
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