If the Federal Reserve raise the interest rate to 5.5%, how will the investors react to the treasury bonds?
Answers:
Quick answer: Short-term bond rates tend to go up as well.
Long answer:
When the Federal Funds rate is raised, it tends to decrease bank liquidity thus reducing the amount of cash available for investing. Short-term Bond interest rates are increased to compete for fewer dollars.
Longer term rates tend to be far less affected.
For a comparison of Federal Fund rates and other rates over the past several weeks, see http://www.federalreserve.gov/releases/h...
http://www.federalreserve.gov/releases/h...
Since the rates of T securities are fixed their secondary market value goes down when general rates go up.
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