My understanding is if bond yields increase it creates demand for a currency. But that means bonds are being sold if yields are increasing? So if bonds are being sold and not bought, thus not creating demand for a currency, why do currencies have a positive correlation with bond yields?
Can you see why I’m struggling? Sorry if stupid question.
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The primary reason why a currency would appreciate when bond prices go down and bond yields increase is because it typically reflects an improvement in economic fundamentals. An increase in bond yields usually indicates an improvement in investor confidence, as investors demand higher returns for taking on the risk of investing in the bonds. This, in turn, can lead to an improvement in the health of the economy, which can create increased demand for the currency of that particular country or region. In essence, investors are willing to pay more money to hold the currency due to the enhanced economic conditions, which leads to an appreciation of the currency.
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