The Basics

What is the connection between bond prices generally and the health of the economic system in which I may invest?

It is important to understand that the price of debt or bonds is related to the general economic cycle of an economy, and the perceptions by the market at large of the prevalence of inflation or a period of falling prices (deflation). It is generally thought that in order to fuel an economy, we must make just the right amount of credit available, and price loans and bond instruments at the appropriate level. If we make credit too cheap, or price our money and debt instruments too cheaply, it may exacerbate inflationary tendencies in an economy. Conversely, if we make the price and availability of our credit too expensive, it may also have a deleterious effect, and cause an economy to slow down. So the pricing of our debt and the availability of credit has great bearing on, and influence upon, economies.


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