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Jeremy Siegel writes in "Stocks for the long run" that when better than expected economic data is released bond prices fall and real interest rates go up.

  1. Why do bond prices fall with better economic data?
  2. So in principle can we say that movements of real interest rates and mortgage rates are mainly caused by such bond price movements and not necessarily changes in federal funds rate?
  3. Better than expected economic results should be a positive signal for stocks. Isn't that in conflict with real interest rates going up?
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1 Answer 1

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1 ) Economic growth benefits firms, and all else equal, that would have a downward effect on bond yields, hence prices would increase. However, inflation and increases in target interest rates (FED FUNDS) may be expected which puts positive pressure on yields, and results in declining prices. Seems Jeremy Siegel thinks the latter is the more common result. However, this is with regard to economic data that beat expectations.

2 ) Not really. Ultimately FF will impact all other interest rates. This answer has lots of details about the relationship and different theories behind it.

3 ) Do you think of stock prices being discounted dividends? If so, that is too simplistic a model to explain stock prices and interest rate moves. Again oversimplified, but if people expect growth or are surprised by better than expected than expected growth, there is usually a lot of risk appetite, which favours stocks (and usually means lower demand for bonds).

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