Question

1*The Federal Reserve reduced interest rates as a response to the economic difficulties created by the coronavirus pandemic. Explain how and why this should impact bond yields and prices. Explain how this could be offset by changes in bond ratings.

Answer 1

During the present scenario the Federal reserve has slashed its interest rate to almost in the range of 0. this is because it wants to stimulate the slowing demand in the economy.Cutting of interest rate is a reflection of quantitative easing adopted by liberal monetary policies of fed.

Amid the corona virus concern , the federal reserve is expecting the growth to slow down and it is taking precautionary measures in form of rate cuts which are part of the quantitative easing which will help in stabilizing the economy because the people will have to pay less and they will also get easy loans at a low rate of interest.

Regimes of low rate is highly important in such situation when there is a need to counter the weak demand in the economy and when economy is on a complete shutdown it needs bailout packages and stimulus packages.

The bond yields of long-term will go significantly down because people will expect the flattening of the yield curve and also and inversion of the curve at some point of time

No,this could not be averted through increase in the ratings of the bond because this is a a long term downgrading of debt securities as the expected rate of return would be lower because of an impending recession.