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What does weakening of bond markets mean?

In the following article, http://www.thehindu.com/opinion/editorial/ominous-retreat/article19259175.ece/amp/

It is written that Bond markets around the globe showed signs of weakness. Yield on German government bonds reached their highest level in 18 months, while that on the 10-year U.S. Treasury bonds reached its highest level in eight weeks.
According to me, when rate of return of bonds drop, then demand for them drops, and hence bond market becomes weak. But here when yield on bonds increase, bond markets weaken is written.
I am unable to conceptualize this. Please clear this doubt.
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Comments

  • Kirti17 said:

    In the following article, http://www.thehindu.com/opinion/editorial/ominous-retreat/article19259175.ece/amp/

    It is written that Bond markets around the globe showed signs of weakness. Yield on German government bonds reached their highest level in 18 months, while that on the 10-year U.S. Treasury bonds reached its highest level in eight weeks.
    According to me, when rate of return of bonds drop, then demand for them drops, and hence bond market becomes weak. But here when yield on bonds increase, bond markets weaken is written.
    I am unable to conceptualize this. Please clear this doubt.

    no.... it's opposite when demand decrease bond yield increases when yield decreases demand increases ...
    ·
  • I couldn't comprehend the entire article when I first read it, and now too. But few points might clear your confusion :

    See, bonds have fixed face value and it is purchased/sold on current price which fluctuates as per demand. Like ill give you a bond( kind of assurance paper) that i will return 100 rupees to you after 10yrs, so pay me 90rs only. You will get ~1% return (CAGR) after 10years. When demand of that bond increases you can sell that to someone else in say 92rs and so one. It will get traded in the market and will fulfill people nead of speculative demand and my(issuer's) need of 90rs loan.

    Monetary policy is just complementary to this. If central bank has kept policy rat at 5%, means you can depoist your money in bank and get 5% return.( what will you do, buy my bond or deposit in bank?)

    so when monetary policy is tight : people prefer investing in bank deposit. And sell their Bond, as now policy rate has become comparatively more lucrative.

    When monetary policy becomes loose, means very meagre interest rate, everyone buys bond. And demand of bond increase. The current price and Face value difference is YIELD. if demand of bonds gets decreased it means Yield will rise, as its current price is decreasing,, people are selling their bonds to invest in bank depost.


    Now in the article, read first few lines again. Federal bank want to end loose monetary policy, means interest rate will imcreas. So will will not purchase bonds now, as it will become less lucrative than bank rate. So demands of bind will drop and bond market will weaken.

    Most of the things in second para is quite technical and related to finance market, so I couldnt get much understanding and not much useful to understand that deeply.
    ·
  • Kirti17 said:

    In the following article, http://www.thehindu.com/opinion/editorial/ominous-retreat/article19259175.ece/amp/

    It is written that Bond markets around the globe showed signs of weakness. Yield on German government bonds reached their highest level in 18 months, while that on the 10-year U.S. Treasury bonds reached its highest level in eight weeks.
    According to me, when rate of return of bonds drop, then demand for them drops, and hence bond market becomes weak. But here when yield on bonds increase, bond markets weaken is written.
    I am unable to conceptualize this. Please clear this doubt.

    When interest rate increases in bond market it means less surety for return,poor investor confidence, as interest rate and safety of return are inversely related. For example if rating agency downgrade india's rating then India has to offer govt bond at higher rates to attract investments.
    ·
  • In sum,

    Bond prices decrease when market interest rates increase because the fixed interest and principal payments stated in the bond will become less attractive to investors.


    From the article, "The U.S. Federal Reserve has already hiked rates this year"
    - So the bond market will weaken as it will become less attractive.

    That is why - changes in bond prices are inverse to changes in interest rates.
    ·
  • In sum,

    Bond prices decrease when market interest rates increase because the fixed interest and principal payments stated in the bond will become less attractive to investors.


    From the article, "The U.S. Federal Reserve has already hiked rates this year"
    - So the bond market will weaken as it will become less attractive.

    That is why - changes in bond prices are inverse to changes in interest rates.

    One doubt, may be in this case bond price will not decrease but comparatively market return is more, therefore people invest there as bonds are ess attractive and yield less return and thus weakening bond market.

    ·
  • edited July 21
    ozzy said:

    In sum,

    Bond prices decrease when market interest rates increase because the fixed interest and principal payments stated in the bond will become less attractive to investors.


    From the article, "The U.S. Federal Reserve has already hiked rates this year"
    - So the bond market will weaken as it will become less attractive.

    That is why - changes in bond prices are inverse to changes in interest rates.

    One doubt, may be in this case bond price will not decrease but comparatively market return is more, therefore people invest there as bonds are ess attractive and yield less return and thus weakening bond market.

    Fluctuation of Bond price depends on 3 things : maturity, yield and credit rating of the issuer.

    Maturity : A 1 year bond will change less than a 10 year bond - Meaning sensitivity of a long-term bond to price change is greater than a short-term bond.

    Yield: Bonds with higher yields have lesser effect so they don't change much. {When a bond's yield is already very high, the changes in interest rate will have less effect on its price than a bond with a lower yield.}

    Credit Rating : better the rating ; less sensitive to interest change.

    These factors don't work individually. It's a combination of these and some other factors.
    ·
  • Kirti17 said:

    In the following article, http://www.thehindu.com/opinion/editorial/ominous-retreat/article19259175.ece/amp/

    It is written that Bond markets around the globe showed signs of weakness. Yield on German government bonds reached their highest level in 18 months, while that on the 10-year U.S. Treasury bonds reached its highest level in eight weeks.
    According to me, when rate of return of bonds drop, then demand for them drops, and hence bond market becomes weak. But here when yield on bonds increase, bond markets weaken is written.
    I am unable to conceptualize this. Please clear this doubt.

    Main bahut zyada economics toh nhi janta but simple language mein samjhane ki koshish karunga

    First of all 2 things
    1. Bonds have face value that owner of bond recieves on maturity which is fixed
    2. Bond yield = value recieved at maturity/ purchase price of bond


    Suppose i purchase bond with maturity value of 100 rs at 50 rs
    So bond yield = 100/50 =2

    If bond market strengthens ie demands of bonds will increase. So my bond will become more attractive and I may sell it at 80 rs
    So bond yield = 100/80 = 1.25

    Suppose bond market weakens so demand of bond decreases so i may have to sell it at 40 rs

    So bond yield increases = 100/40= 2.5

    The Wound is the place where the Light enters you.
    ·
  • I did not read the article and hence I don't know the context, except the opening post. But let me try anyway.

    But during QE period central banks of western nations were buying bonds at a fast pace and hence there was scarcity in the bond market. (Bonds do not have an interest rate but a redemption value. So for a one year bond with a value of 106, a guy buying at 100 would get 6% pa and another buying at 94 will get 12% pa and another buying at 103 will get 3% pa - depends on the demand-supply of bond and the haggling skill of the buyer :) ). Scarcity of bonds meant that the buying price of bonds kept on going higher and higher and central banks even went over 106 (-ve yield) in a few cases where the only aim was to put money in the hands of the people and increase purchases and demand and inflation and hence revive gdp growth. (They did not care for interest rate'; all they have to do is print more paper :wink: ). So the bond market was booming. And the yields were low. Yes?

    This "free" money (central bank was ready to buy even at 105 and 106 via OMOs) was being scooped up by investors and put into equity markets which meant that equity markets began booming too (look at S&P led by the FANG stocks)

    But now central banks (especially Fed) are increasing interest rate and also winding up it's QE programme. So it will buy less bonds from the "bond market", which will mean an excess of bonds available, which means that I can demand a bond at 90 since there are no more buyers from the Fed lining up to buy it at any rate. So the yield increases. But since there are less buyers (and the market looks less crowded) it can be said to be weak. Yes?
    A Lion doesn't concern himself with the opinions of the sheep.
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    ·
  • Sid2688 said:
    ^^ this was the best answer... most relevant material I found on this thread...
    sss_2503 said:

    Kirti17 said:

    In the following article, http://www.thehindu.com/opinion/editorial/ominous-retreat/article19259175.ece/amp/

    It is written that Bond markets around the globe showed signs of weakness. Yield on German government bonds reached their highest level in 18 months, while that on the 10-year U.S. Treasury bonds reached its highest level in eight weeks.
    According to me, when rate of return of bonds drop, then demand for them drops, and hence bond market becomes weak. But here when yield on bonds increase, bond markets weaken is written.
    I am unable to conceptualize this. Please clear this doubt.

    Main bahut zyada economics toh nhi janta but simple language mein samjhane ki koshish karunga

    First of all 2 things
    1. Bonds have face value that owner of bond recieves on maturity which is fixed
    2. Bond yield = value recieved at maturity/ purchase price of bond


    Suppose i purchase bond with maturity value of 100 rs at 50 rs
    So bond yield = 100/50 =2

    If bond market strengthens ie demands of bonds will increase. So my bond will become more attractive and I may sell it at 80 rs
    So bond yield = 100/80 = 1.25

    Suppose bond market weakens so demand of bond decreases so i may have to sell it at 40 rs

    So bond yield increases = 100/40= 2.5

    ^^ this was sabse BAKWAAS ... ek baar main grasp ho gya....

    ·
  • Sid2688 said:
    ^^ this was the best answer... most relevant material I found on this thread...
    sss_2503 said:

    Kirti17 said:

    In the following article, http://www.thehindu.com/opinion/editorial/ominous-retreat/article19259175.ece/amp/

    It is written that Bond markets around the globe showed signs of weakness. Yield on German government bonds reached their highest level in 18 months, while that on the 10-year U.S. Treasury bonds reached its highest level in eight weeks.
    According to me, when rate of return of bonds drop, then demand for them drops, and hence bond market becomes weak. But here when yield on bonds increase, bond markets weaken is written.
    I am unable to conceptualize this. Please clear this doubt.

    Main bahut zyada economics toh nhi janta but simple language mein samjhane ki koshish karunga

    First of all 2 things
    1. Bonds have face value that owner of bond recieves on maturity which is fixed
    2. Bond yield = value recieved at maturity/ purchase price of bond


    Suppose i purchase bond with maturity value of 100 rs at 50 rs
    So bond yield = 100/50 =2

    If bond market strengthens ie demands of bonds will increase. So my bond will become more attractive and I may sell it at 80 rs
    So bond yield = 100/80 = 1.25

    Suppose bond market weakens so demand of bond decreases so i may have to sell it at 40 rs

    So bond yield increases = 100/40= 2.5

    ^^ this was sabse BAKWAAS ... ek baar main grasp ho gya....

    :p ..

    The Wound is the place where the Light enters you.
    ·
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