Question

Use demand and supply analysis to explain how an expectation of Fed rate hikes affect Treasury prices.

Answer 1

An actual increase in the interest rate will make the bonds cheaper and increase the demand for it.Expecting the decrease in the price, the demand for the bonds will decrease in the present times, it will shift the demand curve to the left i.e. at a lower price and lower quantity and higher interest rate. So, as people were predicting a rate hike, an expectation will lead to the same condition in the market. An increase in the interest rate and decrease in price.

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