Bonds and how the prices shift

How much do you guys know about bonds? The Treasury ? Well, here's a simple fact.


Bond yields move inversely to prices and a basis point is 0.01%.


Fears about Europe's ability to address its large debts fueled a massive shift towards the relative security of U.S. debt and away from assets deemed riskier. Still, some analysts say problems in Europe are unlikely to carry fundamental shockwaves to the U.S., where the economy has been steadily recovering.

You see news about China trying to sell off their Europe bonds for fear that the Euros will continue to plummet in the time to come. Let's analyse this conundrum.


Why does China wants to sell the bonds, which is to say the debts of Europe? Well, simple, that's because Europe is in a crisis right now and currently, it is actually taking up loans and rescue packages just to pull through this period.


Normally, bonds and debts are extremely safe because there is no way the government will go on default. In layman terms, there is no way the government will be unable to pay off their debts when the dateline arrives. Hence, it is almost 100% safe to purchase the bonds.


Naturally, when the economy is precarious and when the stocks start to become volatile, people turn to U.S. debts and bonds for shelter.

They purchase bonds with reasonable yields and they sit back and relax, waiting for their yields at the monthly payoff session.


However, when the economy recovers and stocks start to become bullish, people will flock to the stock markets as they are tempted by the way higher returns. Although it's still fundamentally riskier than bonds, people believe that it's worth the risk.


In this situation, the prices of the bonds fall, and naturally the yields rise. This boils down to the principle of Supply and Demand. When people stop buying bonds, the supply of the bonds rise and naturally the prices of the bonds fall and in turn, the yields rise in an attempt to attract the bidders once again.

There are a lot of factors to consider when it comes to the determination of the prices of bonds. For instance, let us look at the debts of the United States of America, when the stocks in America are looking healthy, naturally the prices of the bonds will fall.


However, we need to look at it on the international level as well. For example, the European debt market, China's move on the currency policy, North Korean and South Korean's dispute, Dubai's recurring debt and Japan's central bank. So many things to look out for when it comes to bonds. Each and everyone of these factors play an important role in the determination of the price of these bonds.


Do read up more on your own to find out more about how the prices of bonds move.


:)


Credits -marketwatch, -marketoracle, -socioecohistory, -glennz