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Stock market is going crazy over the past several weeks and one of the discussions has...

Stock market is going crazy over the past several weeks and one of the discussions has been the bond market. Why do you think the bond market is freaking out Wall Street?

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Expert Solution

There is a relation between the stock market and the bond market. When the interest rates increase, money is pulled from the stock market and invested in the bond market because as interest increases return in the bond market increases. Similarly, when in the interest rates is cut then the money is pulled from the bond market and is invested in the stock market.

Recently there was news of yield curve is inverted. The yield curve is the relationship between interest rates and years to maturity. Generally, long duration yield is higher than the short period yield because there is interest rate risk involved in the long-duration bond. But recently 10-year bond yield fell below 2-month bond yield and the difference between the long duration and short duration bond became negative, this shows that the market in the near term is riskier. The same thing happened during the time of the 2008 recession. As a result, the bond market is freaking out wall street.

jeff jeffy answered 1 year ago
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