A simple thread to explain the current fall in the stock market and how rising bond yield is responsible for it.👇
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#bondyields #investing #markets (1/n)
Do retweet for better reach.
#bondyields #investing #markets (1/n)
What is bond?
Bonds are the financial instrument used by governments to raise money. However, there are no free lunches. So, whenever govts issue bonds to raise money it needs to pay the interest on it. (2/n)
Bonds are the financial instrument used by governments to raise money. However, there are no free lunches. So, whenever govts issue bonds to raise money it needs to pay the interest on it. (2/n)
What is face value of a bond?
The face value of a bond is the basic value on which the govt pays interest. Say, if the face value is Rs.1000 and the coupon rate of interest is 10% then the govt will be paying Rs.100 p.a on a bond of face value Rs.1000. (3/n)
The face value of a bond is the basic value on which the govt pays interest. Say, if the face value is Rs.1000 and the coupon rate of interest is 10% then the govt will be paying Rs.100 p.a on a bond of face value Rs.1000. (3/n)
What is the market price of a bond?
The market price of a bond is the price at which it can be bought and sold. This is always fluctuating and it is influenced by the market forces of ‘demand’ and ‘supply’. (4/n)
The market price of a bond is the price at which it can be bought and sold. This is always fluctuating and it is influenced by the market forces of ‘demand’ and ‘supply’. (4/n)
What is bond yield?
Bond yield is nothing but the return which the investor of a bond will earn on the money he put in the bond. (5/n)
Bond yield is nothing but the return which the investor of a bond will earn on the money he put in the bond. (5/n)
Say if an investor buys the bond at its Face Value of Rs.1000 and the coupon rate is 10% then he will earn Rs.100 p.a. Here, the bond yield will be 10% as he is earning 10% of the amount he put. (6/n)
However, if say the Market price of the bond falls below its Face Value to Rs.800, then a new investor buying the bond at Rs.800 and getting an interest of Rs.100 on it is actually having more return on its investment. Here, the bond yield will be 12.5%. (7/n)
Hence, we can say ‘Bond Yield’ is inversely related with the ‘Market Price’. (8/n)
Why are bond yields rising?
With the rise inflation, there will be increase in the interest rates. As the economies are recovering, there will be greater demand. Due to this, there is increased inflation and hence interest rates will go up. (9/n)
With the rise inflation, there will be increase in the interest rates. As the economies are recovering, there will be greater demand. Due to this, there is increased inflation and hence interest rates will go up. (9/n)
How is stock market linked to bond market?
Bonds are safer investment bets as government will ensure you get paid! Even if govt do not have the money, they will mint the money and pay you. (10/n)
Bonds are safer investment bets as government will ensure you get paid! Even if govt do not have the money, they will mint the money and pay you. (10/n)
Hence, as if bond yields increase, investers will now put more money in bonds and therefore there will be outflow of money from stocks. (11/n)
This causes selling in stock markets and hence as a knee jerk reaction there can be panic selling by the retail participants too.
That's what we have been witnessing. (12/n)
That's what we have been witnessing. (12/n)
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