my understanding is that in economic downturns, bond yields are expected to drop as there is a flight to quality bid propping up bond prices.
Dropping yields can also be caused by Central Bank actions (lowering s.t interest rates) to stimulate company borrowing and investments.
The CFAI reading mentions the Russian Crisis of 1998 that sent credit spreads upward… Can someone explain this please… Why did spreads increase during the crisis.
The flight to quality involves selling risky bonds and buying risk-free bonds. Thus, the prices of risky bonds will fall, and the prices of risk-free bonds will rise. Therefore, the yields on risky bonds will increase while the yields on risk-free bonds will decrease: spreads widen.
Ahh yes. As simple as that. thanks
I expect there was also the widening effect from loss of liquidity. Market makers less willing to bid on the bonds, so the riskier bonds demand a higher yield and thereby higher spreads…
Nice to see i’m not the only finance geek on here while the superbowl is on (in the background).
My pleasure.