Hi,
When investors are expecting a decrease in Agg demand, they will increase investment in FI securities as those will benefit from falling interest rates (Schwser, economics, p 142). I thought the reverse will happen as when investors expect a recession, and aggregate demand will fall, interest rates will rise (probably due to decreasing money supply) and as a consequence, investors will top up investment in FI to secure higher interest rates yields brought about by this recession?
Any clarifications on this please?
The Fed will institute lower interest rates to prevent a recession/increase the money supply and to encourage spending and borrowing in a low demand market. Therefore investors that expect interest rates to decrease will buy fixed income securities and sell them at higher prices when interested rates finally begin to fall.
During a recessionary period, the fed will conduct open market operations to stimulate the economy. As you saw from post-2008 to now interest rates where they hit rock bottom and they’re slowly coming back up. Lots of money that were originally invested in FI securities are leaving now.
thanks guys, but i do find this somewhat strange as i believed that interest rates is the factor that entices investors, so falling interest rates should result in a sell off (lower interest income) and higher interest rates results in more buying…
If you hold fixed income securities and interest rates begin to fall, then the fixed income securities you hold are paying higher interest then the current market interest rate on other fixed income securities. Therefore, you hold a very desireable fixed income security and other investors will be willing to pay a premium of face value to buy that security off of you. Therefore, it is favorable for investors that beleieve interest rates will soon fall to purchase fixed income securities, and once they interest rates do fall, sell them off at a premium or higher then what they paid for them.
