Bonds and stocks compete for investment money at a fundamental level, and this suggests that the strengthening stock market will allow to raise funds from bonds. Before the decreased demand for bonds, the sellers will have to reduce prices to attract buyers. Based on this theory, the price of bonds will go lower, while bond yields rose to levels that were low risk adjusted returns found in the stock market.
Although the real balance of bonds and stocks often do not fit into this simple theory, it helps to describe the dynamic nature of these investment alternatives.
The effect of the bull market in stocks in Bonds
In the short term growth in the value of shares will tend to increase bond prices lower and bond yields higher than they otherwise were. However, there are many other variables at play at any time of the investment market, such as interest rates, inflation, monetary policy, government regulation, and overall investor sentiment.
Bull markets are typically characterized by investor optimism and expectations of future growth in stock prices. This adjusts the risk/return dynamic of the market and often leads to investors and traders is relatively less risk-averse. Most bonds (not junk bonds) are safe investments than most stocks, which means stocks have to offer higher returns as a premium for the increased risk. That’s why money is leaving the stock market and goes to the bond market in times of uncertainty. On the contrary it often happens during bull market, as stocks will begin to receive funds through bonds.
Will there be a reduction in bond prices, the positive effect depends on the type of the investor bonds. The current holders of bonds with fixed coupons become more and more damage from falling bond prices as they approach maturity securities. Those who buy bonds as falling bond prices, because it means that they will get higher yields.
The fed and interest rates
Policy interest rates the fed (and other Central banks on markets outside the United States) should also be considered. The fed sets short-term interest rates in an attempt to affect economic conditions.
If the economy is perceived to be struggling, the fed may try to force it to cut interest rates to stimulate consumption and lending. This leads to bond prices will rise. If the strong bull market develops simultaneously with strong economic data, however, the fed may decide to let interest rates rise. This should drive the prices of bonds even lower, as growth in the yield to match the interest rates. The fed intervention has a great impact on stocks and bonds.
Economists and market analysts have a clue about what causes changes in the economy, but the entire system is too interconnected and complex to predict with certainty what will happen. Perhaps bond prices will rise as stocks are bullish the market. Investor confidence is not fixed, and the expected results of the government or Central Bank policy may create results that are not expected. This is part of why it is difficult to develop effective trading strategies based on macroeconomic factors.