What economic condition often leads to higher yields?

What economic condition often leads to higher yields?

• A. Corporate bankruptcies
• B. Stronger economic data
• C. Market recession
• D. Lower unemployment

Answer: (B)

Higher yields in the context of bonds and other fixed-income securities are often associated with stronger economic data. When economic indicators, such as GDP growth, consumer spending, and manufacturing output, suggest that the economy is performing well, investor confidence typically increases. This leads to higher demand for assets perceived as riskier, such as equities, rather than bonds. As investors shift their focus from bonds to equities, the prices of bonds tend to decrease, which inversely causes their yields to rise. Additionally, strong economic conditions can lead to expectations of rising inflation; since higher inflation erodes the purchasing power of fixed income returns, investors will require higher yields to compensate for this risk. Thus, stronger economic data creates an environment where yields on fixed-income securities are generally pushed higher, reflecting the increased expectations for growth and inflation.

Higher yields in the context of bonds and other fixed-income securities are often associated with stronger economic data. When economic indicators, such as GDP growth, consumer spending, and manufacturing output, suggest that the economy is performing well, investor confidence typically increases. This leads to higher demand for assets perceived as riskier, such as equities, rather than bonds.

As investors shift their focus from bonds to equities, the prices of bonds tend to decrease, which inversely causes their yields to rise. Additionally, strong economic conditions can lead to expectations of rising inflation; since higher inflation erodes the purchasing power of fixed income returns, investors will require higher yields to compensate for this risk. Thus, stronger economic data creates an environment where yields on fixed-income securities are generally pushed higher, reflecting the increased expectations for growth and inflation.