The relationship between bond yields, interest rates and inflation

Interest rates have a huge influence on inflation, stock markets, bond yields and liquidity.

Bond yields, inflation and interest rates are connected to each other.

If bond yields go up, then inflation will go up and in order to control the inflation, interest rates must be hiked.

In the times of deflation, the interest rates go down to control the deflation and the liquidity.

Read: What are bonds and bond yields

Read: How interest rates go up and down

Bond yields are inversely proportional and interest rates are directly proportional to inflation.

EFFECTS ON LIQUIDITY
When the interest rates go higher then the bonds and fixed deposits become lucrative as they are risk-free instruments.

Banks, hedge funds, Financial institutions are the biggest buyers of bonds and also they are the players who provide most of the liquidity in the markets.

Because of rate hikes, liquidity will be transferred to bonds and fixed deposits.

It is bad news for stock markets, as the companies which have borrowed money from the banks, they have to pay more because of higher interest rates.

People will move their money from the stock markets.

Read: How interest rate affects the stock markets

Inflation is also connected to demand and supply if the supply of products and services are more then there will be deflation.

If the GDP of the country is growing faster then there should be an adequate supply of money in the markets to recoup the inflation level.

Conclusion

If you are an investor you need to have a close look and tracking of the above three factors, it drives the whole economy.

In my amateur days of investing, I have born great losses because of bond yields.

Don’t depend on borrowed knowledge, keep track of all the things.

Then you will be ahead of the consequences.

About the author

Saifullah Khan

Hi there, I am the owner of gloomyworld.com, read more about me here.

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