Weekly Commentary – Bond Yields and Economy data
Recently, stock market was shaken by messages from Fed’s (Federal Reserve System) officer. After financial crisis, Fed had launched 3 QE to encourage economy grow, but message from Fed’s officer made investor realized the Fed’s bond-buying program would be stopped. It meant the interest rates would rise in the future. In general, there are two possible outcomes if the bond yield rising up: economic depression or economic recovery.
Economic depression:
Under QE, the bond yield had been forced to a lower level for a long time, investor in the market worried the interest rates rising up instantly. Higher interest rates will bring higher cost to business borrower and slow down economy recovery.
Economic recovery:
Recent research show that U.S economy has been growing stably at 2% to 2.5%, under this condition, current interest rates is too low. Rising interest rates would lead the market be more normal.
Under the uncertainty, investor over-interpreted Fed officer’s message, and made the market shaken. But, in fact, NASDAQ index, Dow Jones Industrial Average Index and Dollar index have increased 3.82%, 1.86% and 2% respectively since early May. Global investor worry rising bond yield will bring a chain effect to various assets, since money will flow from higher risk asset to bond market. For more information, an article with more detail will be issued on coming monthly newsletter.
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