Hello everybody ! Here is a paragraph in the article \"JGB yields fall to fresh

Question

Hello everybody ! Here is a paragraph in the article "JGB yields fall to fresh lows" - Financial Times - 14 June 2016 " Yields on Japanese government bonds crumpled to new record lows on Tuesday morning as jittery investors continue to seek safety in sovereign debt across the globe. Nerves over everything from the pace of global economic growth to Britain’s referendum on EU membership have sparked a bond rally that has sent yields toppling, with those of Germany and the UK at their lowest levels on record. " Please explain why when every investors wants to buy bonds, the yield of bond is down, and what is the link between the equity market and the bond market. Thank you

Explanation / Answer

From the micro-economic Demand-Supply equilibrium, it is clear that as the Demand for something increases, so does the price. So, with an increase n demand for bonds, so does the price. Now, bond prices are inversely related to the yield (theoritically for a vanilla bond with fixed coupon rate, the price is the sum of discounted cash flows). Thus, the yield decreases when the price or the demand increases.

Both the equity market and the bond market vie for the X dollars that investors have for investing. Thus, they are generally competing in nature and an upswing in one causes a downswing in the other.

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