Bonds Prices Influence Stock Market: Here are 4 Key Correlations Between Them !
Recently I read a brilliant piece of article on the same subject and therefore thought to present my understanding to my readers on the titled subject . This is very important for all investors in the equity market , as it gives a macro level clue where the stock market may go in the light of tampering of bond prices by the Central Bank or Treasury.
The connection between stock and bond prices, particularly in the context of interest rates, can be summarized as follows:
1.Interest Rates and Stock Valuations
- Increasing interest rates lead to lower valuations as future cash flows are discounted at higher rates.
- Higher bond yields offer investors a viable alternative with substantial returns.So, money maybe withdrawn from equity market and put to bonds. This means , higher the yields, chances of selling pressure in the stock market.
- Elevated interest rates also increase borrowing costs for businesses and their customers, impacting sales, expenses, and profits.
2.Higher the Bond Prices , Lower the Yields .
It is an established factor that bond price and yields have an inverse relationship, and both are influenced by what’s happening with interest rates. When interest rates go up, bond prices usually go down, and their yields go up. When interest rates go down, bond prices go up, and their yields go down. It’s like a seesaw balance between the bond market and the interest rate environment.
3. Impression About Risk Counts Too !
The public impression about the bonds also affect stock market . See, the return (yields) of your investment is directly related to risk associated with the instrument of investments .
The Govt. bonds are considered less risky in comparision of stocks . Therefore , people averse to high risk may park money with givernment bonds and settle for risk-free lower yield than stocks. This impression about low risk with bonds ,influence money movement from stock market to bond market.
4. Analyse Corporate Bonds to Know Individual Stock’s Future !
In high-interest-rate environments, some companies, specially short term debts , are more exposed to high interest debts. In such situations, high-yield bond issuers facing greater default risks on account of higher refinancing costs.
It is for this reason , one should assess a company’s refinancing needs by examining its debt amount and maturity profile.
