Money, Banking and finacial marketsConsiderate the factors that affect bond demand supply. Describe how the following are likely to change during a period of robust economic growth: wealth,...
Considerate the factors that affect bond demand supply. Describe how the following are likely to change during a period of robust economic growth: wealth, defualt risk, and general business conditions. For bond demand/supply,bond price and yield. Bond prices tend to decrease during period of high economics growth. What does this reveal about which of these factors is important?
During economic growth, both personal wealth and investment will increase. People feel more comfortable with their money, and safer investing, so money will travel around more instead of being hoarded. As personal wealth increases, so does consumer activity, spurring even more economic growth. It is only when people feel scared that their money will run out or their investments will crash that they stop buying and start hoarding; if the economy is truly growing, it is partly because of personal wealth and partly because of the feedback loop: money = wealth = spending = investment = money.
It will be interesting to see how the huge and growing amounts of debts owed by governments will affect bond prices. One reason that people are attracted to bonds is that they consider bonds relatively safe investments because the bonds are backed by the governments who issue them. Presumably anyone who bought bonds issued by Stockton, California -- which recently declared bankruptcy -- is now having second thoughts. Presumably this is also true of people who bought bonds issued by such nations as Greece, Italy, and Spain.
Bond price and yield have an inverse relationship: Bp + up, Yield - down; Bp - down, Yield + up. During economic growth, bond prices reduce (-) while interest rate yields increase (+ ; higher interest rate yields). This places default risk in a position of importance: Lenders charge more or less in the way of higher interest rates according to businesses' and individuals' ability to pay (their ability to avoid defaulting on obligations). Ability to pay may be higher and interest lower in a robust economy.
The fact that bond prices tend to decrease in good times shows that general business conditions are most important. People buy bonds because they think stocks will go down. They do not do it because they lack wealth or because they don't think the company or country will default. They do it because they fear that stocks will go down and that bonds are a safer choice.
As other editors observe, bonds is one option for a public who are trying to reach to financial concerns in the economic market. Bonds go up in times of financial stagnation. However, they go down in times of financial growth, so discerning investors will be quick to switch their investments to stocks at this point.
Another factor that affects bond supply is the number of issuing organizations, be they companies or governments, that can supply bonds. If things are going well and everyone has the good credit standing to issue a bond, there will be more bonds. If companies generally have bad credit, they would not issue bonds.