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How Could Trade Wars Impact Bond Yields?


Jul. 2 2018, Updated 11:05 a.m. ET

Expectations regarding interest rates

Interest rates are negatively related to bond prices. That means that whenever there is an increase in interest rates, the prices of bonds fall. Since trade tensions impact investor confidence and might reduce investments in equities, investors might opt for less risky assets such as Treasury bonds.

According to Charles Schwab (SCHW), long-term yields on debt instruments are on a downtrend. The primary reason for investors’ preference for safer instruments is highly unstable global factors. Even the technology sector has been negatively impacted due to the Trump administration restricting Chinese investments in US technology companies. Investors tend to put their money in safer instruments rather than be exposed to the volatile equity markets.

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Can trade wars reduce interest rate hikes?

According to E*TRADE Financial’s (ETFC) subsidiary E*TRADE Capital Management, trade wars might fuel volatility in equities. They have the capability of bringing down global growth. As trade war fears continue to increase, the Federal Reserve might reduce the pace of interest rate hikes. If that happens, brokerages (VFH) such as E*TRADE, Charles Schwab, Interactive Brokers Group (IBKR), and TD Ameritrade Holding (AMTD) could see negative momentum since they benefit from a rising interest rate environment.

Next, let’s see what might help brokerages in the second quarter.


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