Equity markets, despite recent volatility, are still near record highs. At the same time the rate on ten year Treasuries are falling; that is, the yield curve has flattened (even turned negative briefly) and now is moderately upsloping. What "signals" are the equity and bond markets respectively sending? How do you reconcile the those two "signals?"

Question

Hayden Kemp

Business

28 May, 08:18

Equity markets, despite recent volatility, are still near record highs. At the same time the rate on ten year Treasuries are falling; that is, the yield curve has flattened (even turned negative briefly) and now is moderately upsloping. What "signals" are the equity and bond markets respectively sending? How do you reconcile the those two "signals?"

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Answers (1)

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Francis · Answer 1

The record highs in equity markets indicates strong investor confidence in the economy hence more investors are staking their funds in the equity markets. This shows strong / good corporate performance / results. the bond market yield falling shows that the price of the treasury bills/bonds are high. Bond prices go in opposite direction of yield. When the economy is strong or indicative of strength, the price of bonds / treasury bills are usually high and interest rate on them low (fall).

The two shows strength in the economy. A good economy usually has positive equity market prices and high bond/treasury bill prices

Explanation:

Bond prices and interest rates are inversely related. Thus as bond/fixed income instruments prices go up, yield drops which is seen in the question. This is usually noticed in strong economies. Investors confidence are high and thus equity markets performs excellently.