Hey Guys, Do interest rates fluctuate daily or only when the fed decides to change interest rates, reason i’m asking this is whether the yields on bonds fluctuate daily? and if they do indeed fluctuate daily what causes this movements? Cheers
Very broad but basic question. Yes. Bond prices (hence yields) fluctuate daily. Effect of the Fed Interest rates is just one of the many factors that affect bond prices. If you look at the FixedIncome sections, there are variety of ‘risks’ mentioned. The yield adjust to accomodate those risks. These are the corresponding spreads. For example, with all params constant, for a corporate bond, if there is a downgrade of the company that issued it, even if there are just rumors for that matter, the buyers will expect more yield to offset the risk that the company may default on payments (Credit risk). That would change the market price.
Thanks for that, but how about Government Bonds?
Of course Govt Bonds don’t easily map to my credit risk example. But, I think it might help to think about this entire topic not just from the instrument/security perspective. For example, you did not say which country’s bond and which country is holder is from. There might be exchange risk. Even if you are from US and we are talking about treasuries, prices vary because of market expectations on inflation, possible fed response etc. In fact, spot prices of govt bonds with different maturities may clue us as to where the economy may be headed.
Thats great, thank you for the explanation, that makes alot of sense. Appreciate it : )