Bond yields are closely followed by investors as these affect interest rates. In this article we discuss what the relationship is between bond yields and interest rates and how it affects the share market. What are bonds? A bond is a loan taken out by a company or a government when they want to raise money. Purchases of bonds are essentially giving the issuer a loan and the issuers agree to pay back the face value at a specific date. …
Higher interest rates are actually bad for bonds as it means lower bond prices. It is a confusing concept to understand so here is a simplified explanation. Bond yields are monitored by equity investors as it can impact the share market and reflect the direction of the economy. We have written about this on the following blog posts: Why rising bond yields is bad news for the stock market What bonds can reveal about the share market How bonds work …
Read MoreWhy Rising Interest Rates is a Negative for Bondholders
Markets in the US and Australia have recently seen some aggressive selling. The unemployment rate in the US hit a 17 year low of 4.1%, and this caused bond yields to spike higher. The combination of strong employment and bond markets anticipating an interest rate hike sent the market into a selling frenzy. These strong US employment numbers could mean high wage demands and rising inflation which unsettled equity investors. Rising wage pressure may hinder company profits due to increased …
Read MoreWhy rising bond yields is bad news for the stock market