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This could also be a bet that the economy is still yet to improve, as in times of good economy the coupon rate has historically dramatically increased. To extra
by ethn 8y ago
This could also be a bet that the economy is still yet to improve, as in times of good economy the coupon rate has historically dramatically increased. To extrapolate, if the investor expects the economy to peak in 5 years, he would be incentivized to allocate capital into short-term investments such as equities and short term bonds as to defer longer-term investing until those bond yields reach their peak.
- kss238 8y agoIf investors were putting more capital into short term bonds, wouldn't the yield of short term bonds drop, not rise?
- ethn 8y agoYes, so in this case investors are instead placing more of their capital in liquid assets, like public equities. With investors optimistic about the economy, keeping in mind that coupon rates rise during good economies, we would expect higher yield rates in the short term with optimistic investors having both the expectation that equities will outperform those bonds (so capital is allocated away from bonds) and secondly that interest rates will rise as the economy improves. This is exactly what we see when we look at the 1-mo to 1-yr bonds. Coincidentally, the Fed just announced that interest rates aren't expected to rise this year, so we should see a decrease in the yields of the 1-mo to 1-yr bonds.