What is the link between an improving economy and rising govt. bond yields?
Happy Christmas and New year to all.
I’m learning about forex and the book that I am reading (Forex for Dummies) mentions rising 10-year government bond yields as a possible indicator of a currency that may be on the way up in relative value. The logic is that the increase in bond yield indicates a rising economy and therefore a greater possibility of an interest rate increase at some point in the future in order to keep a tab on inflation. Therefore more buying interest in the currency now and a rising relative currency value.
The link that I cannot make is the link between the rising economy and the rising bond yield. Is it because people are dumping bonds and buying stocks instead, thus pushing the bond price down and the relative value of the yield up. Or what?
Thanks.
Essentially, yes. Perceptions of a “rising economy” will tend to move capital out of relatively low-yield bonds and into equities. Thus, the bond yields rise because demand for them slackens.
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