Question

The credit crisis was caused by the mortgage market, yet it had a serious impact on bond markets. Write a short essay on how the bond market was affected, and offer your opinion on how the bond market may attempt to insulate itself from a credit crisis in the future.

Answer 1

For the investor who lived the financial mortgage crisis of 2008, they are still living with that nightmare. It was the worst collapse of all time. It was considered as greatest depression that devastated lifetime investments turn the whole generation against the stock market. There was a huge impact on Bond Market as well.

When financial markets realized the credit crunch would impact on the wider economy, shares of the company started to fell further. This was the typical response which nobody was expecting. As per the Economics, when the economies enter into a recession, companies make less profit, and so they pay lower dividends. This will make shares less attractive and demotivate the investor to invest in stocks or bonds. However, on the prospect of recovery, Shares bounced back from their nadir in the end of 2008.

One side where people lost their trust on stock market, they started trusting bond market especially government bonds which are considered as "Safe Haven". Generally, in case of uncertainty, investors prefer safe and somewhat assured investments like government bonds. Therefore, at the brink of credit crunch, there arises a strong demand for government bonds as people generally seek for security. Government bonds have also been influenced by the policy of quantitative easing. This includes the creation of money to buy assets such as government bonds. Therefore, Central Banks have been increasing their holding of government bonds. This has caused the price of the bonds to rise, due to high increasing demand. The recession and financial bailout have caused government borrowing to increase substantially. So that there will be a lot of bonds to sell for government.

But on the other hand, Private bonds took a big leap in its value like stock market, as they are depended on well-functioning of firms. But firms were going through a financial crisis due to global financial mortgage crisis.

Private Firms should take learning from this and start working on it so that; they should be prepared for future. Private firms should also keep some of their investments in debt or bonds and derivatives market, so that if in future the share market falls or go through such financial crisis, then they should be able to compete against it