R
r_v.s
Member
Would you pls help summarise the relationship between exchange rates and bond yields?? The US - UK example in the notes has me completely confused 
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Hi. Maybe you could be a bit more specific? How about you outline the parts of the relationship between exchange rates and bond yields you've understood, and then we can fill in any gaps?
R
r_v.s
Member
Hi Mr Hales.
What i'd really like to know is what happens to bond yields when the exchange rates increase? Is there some way to understand this like the relationship between bond yields and interest rates - like for ex. if interest rate increases, bond price falls and yields rise?
PPP and exchange rates i can understand, but how does that fit in here?
Im so sorry but try as i might Im unable to wrap my head round this
What i'd really like to know is what happens to bond yields when the exchange rates increase? Is there some way to understand this like the relationship between bond yields and interest rates - like for ex. if interest rate increases, bond price falls and yields rise?
PPP and exchange rates i can understand, but how does that fit in here?
Im so sorry but try as i might Im unable to wrap my head round this
M
manish.rex
Member
An increase in the FX rate means that domestic currency is depreciating against the foreign currency. This in general implies an oversupply of money in the forex market in particular and in the economy in general (reverse is true for supply /demand of foreign currency).
In such a situation,if the central bank does not lead an sterilization program, this will mean a monetary expansion in the economy, leading possibly to hardening of bond prices, or worsening of yields.
this is one of the many possible explanations. Another one is that a depreciating currency will mean a higher inflationary expectation, particularly when the economy has demand inelastic imports (like fuel). In this scenario too, the rates will go up to compensate the investors for higher expected inflation premium for fixed income products.
In such a situation,if the central bank does not lead an sterilization program, this will mean a monetary expansion in the economy, leading possibly to hardening of bond prices, or worsening of yields.
this is one of the many possible explanations. Another one is that a depreciating currency will mean a higher inflationary expectation, particularly when the economy has demand inelastic imports (like fuel). In this scenario too, the rates will go up to compensate the investors for higher expected inflation premium for fixed income products.
Hi Mr Hales.
What i'd really like to know is what happens to bond yields when the exchange rates increase? Is there some way to understand this like the relationship between bond yields and interest rates - like for ex. if interest rate increases, bond price falls and yields rise?
PPP and exchange rates i can understand, but how does that fit in here?
Im so sorry but try as i might Im unable to wrap my head round this
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Bond prices are affected by supply and demand. If it's anticipated that an appreciation in the domestic currency is likely, then foreign investors might demand domestic assets now in order to benefit from the enhanced returns they'll receive (in their own currency) in the future. This might stimulate demand and so increase bond prices (and therefore reduce yields) in the domestic currency.
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