Economy February 11, 2022 | 2:56 pm

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New data current inflation pressures bonds even more

Fears gained strength yesterday that current inflation will not subside for now, as the 10-year US bond yield hit 2%, after learning that inflation climbed to 7.5% year-on-year in January. The market’s reaction is explained because inflation works against bondholders by reducing the interest received.

Rising inflation means that the future interest payments you receive for holding the bond are worthless. This also makes the bond less attractive.

Bonds have become the first victim of the panic generated by inflationary pressures. With the increase in yields on government bonds, debt investors are pointing this out to governments and central banks.

To understand the rise in bond yields, you must understand how the market works. If investors flock to bonds (which is more likely when inflation expectations are low), their prices will rise, and yields will fall.

If investors start to walk out, prices will drop with a consequent rise in yields, which is currently happening.

If yields on the 10 – year US Treasury note continue to rise, it will hurt Wall Street stocks. According to calculations by Ned Davis Research, the Nasdaq could fall as much as 20% if yields continue to rise and the bond stands at 2% at the end of the year, something that the consultancy takes for granted.

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Felix Arroyo
February 12, 2022 2:51 am

If the investor flock of out of bonds, they will go to stocks and not to cash! So why will the market go down? Unless you are saying that the price of borrowing money will go up and the value of money will go down due to inflation. So the only escape route is stocks and real estate which always goes up due increasing population