can some explain the overall investing issues with bonds and the business cycle? Is the below correct? Recession: Lower interest rates = lower bond yields = higher prices? Recovery: Rising interest rates = Higher bond yields = lower prices? And how are you supposed to invest knowing these actions? Btw, on schweser page 100, it states that during a recession the credit risk premium increases becasue default becomes more likely. Wouldn’t that increase bond yields, contradicting the statemetns above?
Here is the underlying action: In recession, money pulls out of equity and moves into safer investments such as bonds, which drives up price and decreases yield. Vice versa. While lowering interest rate lowers yield on treasuries, corporate bond may or may not follow suit depending on more fundamental factors such as demand/supply and credit risks.
Good point phBoom, corporate bonds may or may not follow suit. I guess we are moving into a period where the concept of ‘risk free’ with respect to govt debt is changing. Some AAA corporate bonds may have lower credit risk than govt bonds.
I think it just means that for high grade investments, credit spreads will probably not change as much as the base rate during recessions. T-bonds/bills/notes are an obvious example.