Tapering effect on bond and equity markets
Is this the right way to think about tapering and its implications?
So when the fed announces tapering, it reduces purchases in asset-backed securities, and it announces rate hikes in the near future. This causes bond price to decrease (inverse relationship with rates) and yield to become higher. Therefore, higher yields make the bond market relatively more attractive causing some ppl to go from equity --> bond market. In essence, higher rates suggest that the present value of stock's future earnings are lower.
Sure. Another way to think about it is this. Same logic, rates rise, causing cost of capital to increase. As a result, the present value of future cash flows diminishes, causing equity markets in theory to fall. But who knows, maybe shit keeps rippin
got it - thanks for the help!
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