Friday, December 17, 2010

A comment on Bond Yields from our MERIX economist, John Bordignon

Bond Yields are influenced by many factors....inflation being one.....based on the last inflation forecast, inflation has actually risen to an annualized rate of 2.0%, Bond yields were below 2.0% for a short period of time a few months ago......if you are an investor and inflation is 2.0%, why would you invest in a bond that yields a rate lower than inflation?.....if you did you would actually be losing purchasing power.

Secondly the bond prices are driven by supply and demand.....too much supply and not enough demand typically drives prices lower therefore yields rise........Canadian Bonds were a global darling a few weeks ago (European instability) and that drove prices up and yields down......as the situation settled in Europe demand dropped off and bond prices fell, yields went up.

Thirdly, U.S. is actually doing better than what people had been expecting, again, inflation is low in U.S.(less than 1%) so U.S. Bonds are becoming more attractive, this too puts pressure on our bond prices.

As you can see there is not ONE factor that drives bond prices, there are several.....the big factor is investor sentiment and thinking, like some investors, they may not always be rationale

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