Question

Knowing that interest rates are determined by the supply and demand for bonds, and knowing the...

Knowing that interest rates are determined by the supply and demand for bonds, and knowing the factors that cause sifts in the supply and demand for bonds, discuss how you think interest rates will behave over the next 6 month assuming the pandemic related economic downturn continues.

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Answer #1

As the pandemic related economic downturn continues, over the next six months, 10-year US treasury yield is expected to fall further. As the US government continues to pump money into their economy, supply of US dollars in the markets would increase, this would translate into a rising yield curve but as stimulus packages hit the economy, there will be a plight to quality. Investors would move from high yield to safe treasuries. Additionally, one more reason for falling yields would be falling inflation outlook. Subdued consumption & investment would force the government to continue to pump money into the economy, but this would most probably translate into savings (leakage) due to fear of further economic downturn.

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