Why is it that when stock market goes up, bond market goes down and vice versa?
2007-01-14 03:39:04 · 5 answers · asked by inquisitive_me 1 in Business & Finance ➔ Investing
As interest rates go up, the yield on bonds goes up, making them more attractive. Not to mention that many companies carry fairly heavy debt loads, and when interest rates go up, it hurts them.
2007-01-14 09:59:27 · answer #1 · answered by Always Right 7 · 0⤊ 0⤋
Investors have a choice between bonds and stocks. When bonds pay more, they move to bonds, and vice-versa. The laws of supply and demand drive up the price of the more desired commodity and drive down the price of the other.
Someone else will give you a ten-page lecture, but that's the basic reason, without going into what economic factors like inflation that drive the prices of stocks and bonds.
2007-01-14 03:54:19 · answer #2 · answered by Yardbird 5 · 1⤊ 0⤋
A lot of the time the capital flows are going from one to the other - hence dependent change. However Bonds are perceived as low risk and equities as high risk - so as market conditions change companies in the market will either direct clients to one or the other but will also shift their asset allocation strategies.
2007-01-14 09:30:32 · answer #3 · answered by LongJohns 7 · 0⤊ 0⤋
It is switching of funds by investors from Bonds to stock and vicer versa. When the interest rate moves up in anticipation of inflation lowering of price of bonds investors sell of Bonds and move into stock. When interest rate moves down the switching is from Stock to Bonds anticipating price rise in Bonds.
2007-01-15 03:31:44 · answer #4 · answered by Mathew C 5 · 0⤊ 0⤋
If interest rate goes up, people will expect their money to earn more as the result. Immediate reaction is to withdraw money from stock market and invest in cash. That is esp true if the market perceives that stock will not earn much more. Investing in stock market requires a certain "premium" above investing in cash market since the risk it carries in investing in stocks. Thus if interest rates goes up, the "premium" in stock market must go up for it to be equally attractive. If not, the smart investor will think that the return in investing in stocks doesnt justify the risk it carries and withdraw the money. When interest rates go down, smart investor will now put their money back to stock market since the "risk premium" is now becoming more attractive. Thats why usually stock market generally moves in opposite direction to interest rates. At least in immediate term.
2016-05-24 00:19:22 · answer #5 · answered by Anonymous · 0⤊ 0⤋