What happens to the interest rates on bonds during recessions. I am confused becaus
During an economic downturn,income and wealth are falling and thus the demand for bonds fall at every
Or an alternartive explanation:
In recessions the government tends to cut interest rates in order to stimulate economic activity by creating incentive for banks to lower their rates on loans to consumers and firms, encouraging consumption and investment. This can lead to the interest rates on assets falling. Bonds are often a safe haven during recessionary periods because they offer a fixed income stream in times of uncertainty, and thus they may be favoured to other types of assets invesmtents increasing demand for bonds. The increase in demand Increases price of bonds thus decreases interest rates.
or in terms of supply: the supply of bonds may fall because there is less incentive to raise investment funds through issuing bonds when investment opportunities are low. When supply of bonds decreases, price rises and interest rates decrease.
what is the overall effect on interest rates in recessions - is there any empirical data to support the answer?
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