Poor economic times effect on bond prices

[Buffettology88]

Hey everyone. Hope your brains are hurting too bad.
For a 5 year bond, why do prices rise during bad economic times (Schweser question)? I understand flight to quality and easing monitary policy, but doesn’t that mostly effect the short end of the yield curve? And as a follow up depending on the answer to that question, how do bad economic times effect longer rate bonds like 10, 20 years? Or is this one of those “it depends” questions.
Thanks in advance.

 

[sachin_patel]

Interest rates affect all terms.. to different extent.
since during bad economic times, government ease monetary policy and interest rates decline, it will cause bond prices to increase.
The longer the duration, the greater the price will be impacted due to positive convexity.
Hence when interest rates decline
5 years bond price will rise, 10 year bond price will rise even greater and 20 year bond price will rise even to a greater extent..

 

[kjsgbp]

Also, inflation tends to be lower.

 

[whatsyourgovt]

Buffettology88 wrote:
Hey everyone. Hope your brains are hurting too bad.
For a 5 year bond, why do prices rise during bad economic times (Schweser question)? I understand flight to quality and easing monitary policy, but doesn’t that mostly effect the short end of the yield curve? And as a follow up depending on the answer to that question, how do bad economic times effect longer rate bonds like 10, 20 years? Or is this one of those “it depends” questions.
Thanks in advance.

Did they specify any other information as to credit quality? If not, its such a bad question bc you could remark for IG and they could be referring to HY.

 

[Buffettology88]

kjsgbp wrote:
Also, inflation tends to be lower.

Ahh inflation makes sense to me. Thanks.