Why is increased money supply bad for corporate bonds (lead to increased yields) ?
I would think money supply up = interest rates down = good for bonds.
increased money supply would have two (at least) impacts on corporate bond yields: 1) impact on treasury yields - higher yields (prices down) - due to increased outlook for inflation in expansionary environment 2) impact on corporate spreads above treasuries - spreads would be down in short term (during current strong economy), but would lead to higher spreads in longer term (as economic growth slows following anticpated monetary tightening) Overall: 1) would be the donomiant factor in overall pricing - ie yields higher --> prices lower
I would think that it has to do with the credit spread. Maybe if the Fed is lowering rates because we are just hitting a slowdown and credit spreads are going to widen?
because its inflationary.
KRochelli Wrote: ------------------------------------------------------- > because its inflationary. Wouldn’t that affect all bonds?
KRochelli Wrote: ------------------------------------------------------- > because its inflationary. That makes sense.
Since changes in monetary supply is systematic, it should have similar effect on all “normal” fixed income products, and leave yield spread between classes of bonds little changed.
maybe because money supply typically goes up during recessions -> rate of defaults should increase -> spreads increase -> yield of corporate bonds increases while yields of treasuries decrease inflation kicks in after recession
maratikus Wrote: ------------------------------------------------------- > maybe because money supply typically goes up > during recessions -> rate of defaults should > increase -> spreads increase -> yield of corporate > bonds increases while yields of treasuries > decrease > > inflation kicks in after recession This is what I was alluding to earlier. Fed usually lags the business cycle. They are late to the game.
mwvt9 Wrote: > This is what I was alluding to earlier. Fed > usually lags the business cycle. They are late to > the game. I agree with you. I like your concise explanation.
Presently upward yield curve and will be inverted later. Also, econony is in downturn, so credit spread increases.
yeah, i was thinking about this too and my computer crashed. if the curve will be inverted, you won’t be short both key rates.