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Affect of Falling Interest Rates on Bond / Equity Prices
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Andrew59
Posted: 07 May 2024 12:16:47(UTC)
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Joined: 20/10/2020(UTC)
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Basic question - but I'm going round in circles!

All other things being equal, if central bank interest rates reduce should that be good for bonds? ie investors will want to lock in the current high rates at the short end of the yield curve, and obviously yields would fall as a result.
Then also if I understand things correctly falling rates is also good for mid and long dated bonds as they suggest inflarion is expected to reduce meaning the value of future cash flows is higher.

IF my understanding is correct - and I would like someone to correct me if I'm wrong - wouldn't this also be good for equities?
Yet we are told that bonds and equities usually/often move in opposite directions (diversification/protection and all tha in a 60/40pf).

Not sure that can all be right.

Views.

Thanks.
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Tim D
Posted: 07 May 2024 12:37:14(UTC)
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Anticipation of interest rate cuts is ALREADY PRICED IN.

Bonds only re-rate one way or another if/when the anticipated timescale or magnitude of cuts changes. And if you ever got a big surprise move in bonds on the day a central bank actually cut or hiked, that'd be considered a pretty big failure of the bank people's "signalling" work.

Impact on equities seems hard to gauge to me. Fears of slowdown/recession (negative for stocks) compete with hopes for the rate cuts (positive for stocks) the central bank's stimulus to counter that slowdown will bring. (And there's the spectre of stagflation lurking: recession but with high inflation that demands rates be kept high).

Perhaps better to be prepared for all outcomes - all weathers? - than make macro calls betting on any particular path.
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3 users thanked Tim D for this post.
Harry Trout on 07/05/2024(UTC), Andrew59 on 07/05/2024(UTC), MBA MBA on 09/05/2024(UTC)
Bob Brook
Posted: 07 May 2024 14:48:51(UTC)
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Andrew59;304947 wrote:

Yet we are told that bonds and equities usually/often move in opposite directions (diversification/protection and all tha in a 60/40pf).

.


I think that really depends on the crisis at the time as to what those two will do.

E.g inflationary shocks usually see base rates rise and bonds fall. Whereas recessions can cause the other reaction.
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1 user thanked Bob Brook for this post.
Andrew59 on 07/05/2024(UTC)
Thrugelmir
Posted: 07 May 2024 15:50:28(UTC)
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Andrew59;304947 wrote:

Yet we are told that bonds and equities usually/often move in opposite directions (diversification/protection and all tha in a 60/40pf).



We've had an era where Western Central Banks have printed money by buying debt. Surpressing bond yields on a variety of debt instruments as a result. The BOE stands alone in now only holding Government Gilts. Both the FED and ECB are somewhat different. While a 60/40 portfolio may have fallen out of fashion for a period. As time passes highly lightly that old the old norms will be restored. Over a decade of unusual fiscal policy isn't going to reverse overnight. The long term direction of travel is clear. More than likely going to a a lot of zig zagging along the way.
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3 users thanked Thrugelmir for this post.
Andrew59 on 07/05/2024(UTC), Guest on 07/05/2024(UTC), MBA MBA on 09/05/2024(UTC)
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