Eli5 why government bonds affect the equity market.


Eli5 why government bonds affect the equity market.

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Government bonds can have different rules. For example, some government bonds are free of taxes on their interest, so even though they might pay a little less you don’t have to split the profits with Uncle Sam.

The effect is that they provide an alternative, competing with commercial bonds for investors. They are typically on the “safer” end of the risk spectrum, providing less profit but exposing the investor to less risk. Well balanced bond portfolios might invest some part of their money in them for that reason.

It’s a trade off of risk vs. return. If the choice is 1% guaranteed or 7% avg. but highly risky return, more people will choose risk to try and earn 6% more. If the guaranteed return is 4% vs. risky 7%, many investors will choose the guaranteed return in that case, shifting money from equities to bonds.