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Why does the narrowing of trade deficit cause an increase in bond prices? I do understand that narrowing of trade deficit leads to narrowing of capital account surplus. Also, investor confidence rises which might push the demand for bonds high and cause an increase in bond prices?

But is there any other reason?

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lower deficit means more export, so more foreign currency is coming into the country. Part of this goes to buy bonds. More demand means higher bond prices. People in the countr might feel richer too, because there is more exports, so more income to them. They might buy more bonds too.

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It all has to do with the yields of the bonds. High bond prices = low yields. Low bond prices = high yields.

If the debt is narrowing (aka less debt), then that means investing in the bonds are safer. You do not get paid higher yields for safer investments. You get paid lower yields. So taking this into account, prices of bonds rise due to safer investments(because less debt), and bond yields go down. Hope this helps.

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