Demand for Bonds Essay Example | Topics and Well Written Essays - 1000 words

look at for Bonds - Essay ExampleThus in that respect allow for be a windfall loss if bonds argon purchased. Thus, bond demand will be low. This also implies that if expected future bond prices are high, consequently the demand for bonds will rise and depravity-versa. iv) Expected inflation Expected inflation has an unfavourable impact on bond demand. If in that location is an increase in expected inflation, bond demand will fall and vice versa. v) Relative risk If the risk associated with a bond increases relative to other assets the demand for that bond will fall. Analogously if there is a decline in the relative riskiness of a bond, its demand will increase. vi) Relative liquidity If there is an increase in the relative liquidity of a bond, i.e., if converting the bond into bills becomes relatively easier, the demand for it shall rise if other things remain the same and vice versa. vi) Business-cycle movements If the economy is undergoing a boom, there will be an increase in the demand for bonds. Similarly, the demand for bonds will fall if the economy is execrable a recessionary period. b) Analyse the following statement This week, the yield on the US treasury maintain closed below 3%, a level not seen in 50 years. In the UK, the 10-year begild yield sits below 4% for the first time since 1961, according to UBS. Germanys Bund yield is closing in on 3%. ... This time, the threat of delfation is being taken more seriously. Should policymakers again avert that fate, bond yiels whitethorn be primed for an explosive rise as fiscal spending plans and the expansion in silver supply suggest inflation is the likely outcome. Source Financial times 28-Nov-2008 Before commenting on the tale it will be useful to note that as mentioned above bond demands (and thus investment) are bring forth by business cycle booms and dissuaded during recessions. However, during booms since the threat of inflation looms large, it is a natural counteracting force to the possibility of overinvestment. Similarly, during recessions, the adverse effect on the demand for bonds can be countered by the threat of deflation. Now, lets turn to the report. The first and maiden point to note in this context is the date of the report. It is dated November, 2008. Thus the US, UK and the German economies were in recession, arguably the worst one since the great depression (This was during the heart of the global financial crisis). Thus, one should expect expansionary monetary policies during this time. Lower interest rates ideally stimulated investment demand and thus increase the potent demand which leads to an expansion in real aggregate output with a multiplier effect and thus employment as well. What is reported seems to be along the same lines of intention. The current yields on US Treasury note fell to a level that was a precedent in 50 years. Similarly there was a decline in long term yields in the UK economy (gilt) and Germany (bund yields). However, i n order for this policy to work, the falling bond yields