Bond Yield and Short Term Rates

Hi All,

I cannot quite understand the below statement in textbook Vol3, Page 53,

The capital market effects for “slowdown”:

Short term rates are high and rising at first but then peak. Bonds top out first then rally sharply(yield fall) . The interest-sensitive stocks such as utilities performing the best.

Q1: Why utilities are interest-sensitive?

Q2: as I understand bond prices shall have the opposite trend with the interest rates.

So as interest rate are rising then peak. The bond prices shall decline till bottom and the yield shall rise till peak.

Am I correct? wink

Q1: utility companies usually carries heavy debt loads due to large infrastructure spending.

Q2: Yes, bond prices have a inverse relationship with interest rates. I’m just genuinely curious, how did you get to level 3 without knowing that?

Thank you Kev,

Could you look into question 2 again? I am asking why it is said that the bond yield shall fall given that interest rates are rising?

Bonds do not have short maturity in general at least that is the implication in the statement.

The long rate may be slower than the short to rise, so money may begin to shift to long rate from the short . If this happens in great strength , then demand will force yields down

Thanks Janakisri…did i draw the right inferences?

Yield Curve Inverts Slow down Rates: high, rising Prices: Falling Yields: Low Demand: Low (investors shift to longer end of yield curve) Rates: high, rising (but less than S/T) Prices: Falling (not as much as S/t) Yields: Lower; Spreads Narrow (Plight to quality) Demand: Low (investors shift to longer end of yield curve buy treasury) Tops

It is my understanding that the short end of the yield curve is more concerned/affected by monetary policy and the longer term is concerned/affected by long run expectations/govt policy. So dont think of interest rates being affected by monetary/fiscal policy all the same way. Plus as yields peak, buying the long bonds will be cheaper as a rotation out of stocks. Please feel free to correct me if I am wrong.