Can someone explain to me why higher short term rates make bonds less attractive in relative term?
what makes bond investment attractive? High yield or price?
High yield, or expectations of lower interest rates.
Higher short term rates might not translate to higher long term rates, making bonds relatively less attractive. This is the essence of what I’m getting from your post.
No offense, but wasn’t this a rather important concept already in CFA I and II?
Short explanation, if a bond pays a 5% coupon and rates rise to 6% this bond is not attractive anymore at face value, so its price will need to decline until it reaches a 6% YTM. If short term rates rise there is less incentive for investors to invest in long-term bonds instead of short-term paper, so long-term rates will (in most cases) also rise, impacting longer-term bonds.
I reread the section I go it now.
As easy as rather talking effective explanation Mace