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davepamn davepamn
 

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 M¢25  Funded By Mahalo ? |  November 14, 2009 02:31 PM

How does the Bond Market affect the Stock Market?

What will happen to the Stock Market, if the Bond Market sharply trades off?
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opher opher
 
 November 14, 2009 02:54 PM
There are two main ways. First, when the bond market offers high yields for investment-grade bonds, the stock market loses demand, as many investors move their money to bonds to cash in on the safer high returns there. This causes stocks to go down (less demand, more supply).

The second is that for a specific company, its bonds show something about the health of the company. If the company is doing well, its bonds will probably go up in price, as more people have confidence the bonds will not become worthless through the company's failure. This pushes down the yield on that company's bond, and signals that the stock is likely to go up. Conversely, if a company hits a rough patch, its bond yield will likely go up, and that will signal a probably downturn in its stock price.
Asker's Rating:
• We will know soon if the Bond Market is a bubble because it due to correct.


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davepamn davepamn
 
November 15, 2009 01:02 AM
How will a dollar rally affect the Bond Market?

Is the Bond Market the next big bubble?

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opher opher
 
November 15, 2009 02:22 AM
I'm not an expert, so take the following with a grain of salt. A dollar rally would not affect domestic investors directly. However, it would make our bonds and stocks more expensive for foreign investors. This might incline those investors to take some profits, especially if they expect the dollar rally to be short-lived. In addition, a dollar rally would make our products more expensive overseas, implying a likely reduction in profits for US companies deriving a significant fraction of their income from foreign sales.

As for the bond market being the next bubble, I don't know. I have read that the yield curve is no longer flat primarily due to the Fed keeping short term rates especially low to help economic recovery. How long the Fed can and will choose to keep doing so is very uncertain. Once they stop, short term rates will climb, pressuring bank profits. It will also slow economic activity which depends on cheap credit. Higher rates will tend to depress bond principle values.

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davepamn davepamn
 
November 15, 2009 11:23 AM
You raise the most important issue of rising interest rates, "pressure on bank profits". Banks are extremely weak. Banks are intensely interconnected. When one large bank fails, it has a cascade affect on smaller banks. Small profit margins have pressured many banks out of business. There is a perceived fear that banks are too weak. The fed is governing closely the policies of the banks. However, as profit margins decrease, the fed will act as a lender of last resort and not a new customer.

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opher opher
 
November 15, 2009 12:57 PM
What makes things tougher on banks is that they're also afraid to lend to customers while the economy is weak, for fear of having the debt go bad and losing the principle. In addition, the credit card business is no longer anywhere near as lucrative as it used to be a few years back. More bad debts there, and a new consumer protection law that limits the bank's bad behavior (good for everyone in the long term, but problematical for the banks' profits in the short term).

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davepamn davepamn
 
November 15, 2009 01:26 PM
How big do you think the Bond Market bubble is? Or in other words, how profit pressure could occur, if interest rates increase 20-30 percent from where they are now.

http://www.bloomberg.com/intro_markets.html

U.S. 10-Year Treasury 3.42

If rates rose to 4.32 % (30% increase) then loans connect with the US Treasure would rise. I expect the interest rate rise would create pressure on the mortgage back securities and directly influence variable rate loan rates to rise. For individuals, shifting to the fix rate, they would escape, if they can maintain a job. Foreclosure rates would continue to rise. Banks would be under greater pressure to shed the risk. More assets on the market would depress price. Inflation will make price more expensive in durables and services, further weakening investment.

Banks have said they have plenty of money to loan to large and stable customers. Credit would continue to tighten as money becomes more expensive to borrow.

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