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Long-term bonds and some corporate bonds may become more attractive if interest rates continue to fall in 2025. As market demand shifts from shorter-term bonds to longer-term debt instruments, the ...
However, technical factors, such as a flight to quality or global economic or currency situations, may cause an increase in demand for bonds on the long end of the yield curve, causing long-term rates to fall. Falling long-term rates in the presence of rising short-term rates is known as "Greenspan's Conundrum". [11]
When bond interest rates fall, the prices of older, higher-yielding bonds rise. Buyers pay more for higher-yielding bonds because they can no longer score the same yields by buying new bonds. That ...
In that scenario, expected future short-term rates fall below current short-term rates, and the yield curve inverts. [10] [11] A related explanation holds that when investors who value interest income expect recession, a shift in Federal Reserve policy and lower interest rates, they try to lock in long-term yields to protect their income stream.
Instead of long-term bonds that are especially sensitive to Fed rates, it prefers short and intermediate maturities that provide investors with attractive yields without greater interest rate risk ...
In the case of high-yield bonds, the risk is largely that of default: the possibility that the issuer will be unable to make scheduled interest and principal payments in a timely manner. [2] The default rate in the high-yield sector of the U.S. bond market has averaged about 5% over the long term.
A change in interest rates typically affects longer-term bonds more than it does short-term bonds. Bonds expiring in the next year or two will feel minimal impact from an environment of rising rates.
The Fed cut its federal funds rate — the interest rate banks charge each other for short-term loans — by 0.25 percentage points, lowered the rate to a range of 4.25% to 4.5%, down from its ...