newbie question about bond prices

[vinnie8]

economic news which are worse than expected make the stock indices drop, right? but what happens to bond prices? do they go up? why?

 

[grantx]

Vinnie,

To minimise damage to portfolios through stockmarket volatility and uncertainty investors will switch or diversify from stocks to the the relative safety of bonds. This may only be a temporary measure - when the market is perceived to OK, investors will revert back, thus rising stock markets, falling bond markets.

Grant.

 

[Rhody Trader]

Stocks won't always react negatively to poor economic data, and at the same time bonds won't always react well. It depends on the implications, especially where it relates to interest rate policy. Anything which furthers the market's view that the central bank will cut rates will tend to be a positive for bond prices. Anything which suggests rising inflation, though, will be negative for bonds.

The relationship between bonds and stocks is a dynamic one. Sometimes they move together. Other times they move in opposite directions. It generally depends on where things are in the business/economic cycle.

 

[arabianights]

This is very general and does not actually apply to all bonds, but a bond has a par value (we can ignore coupons) meaning that at point x the bond issuer will give the bond holder y currency units. It therefore follows that the price a buyer is willing to pay for the bond can be calculated from the return (yield) that the buyer wants by logs. When price goes up, yield goes down.

So to understand why a buyer will accept one yield rate at one time and another at another time, the main factors you need to consider are tolerance for risk and expected future interest rates. The voodoo comes from understanding how each economic release will affect either of these factor for the market as a whole. This is not easy