Bond Market Rollercoaster

Alright, it's not the death-defying coasters at some theme parks, but the bond market definitely goes up and down with daily fluctuations.

Long-term bond interest rates fell below 5% yesterday and ended up at 4.98%. Just the other day, it was at 5.13%. Not too long ago, it was at 5.25%. The Federal Reserve Board hasn't met since all this happened, so who or what is responsible for this?

The answer is--the same people responsible for the ups and downs in the stock market. Everyone who trades in the bond market; from the biggest buyer and seller, to the smallest.

Supply and demand controls the bond market. As demand comes into the bond market and more people buy bonds, bonds go up in price and interest rates go down. When more people sell bonds, they go down in value and the interest rates go up. It's really that simple.

What determines interest rates in the bond market?

Well, it's not a catchy title, but...

There are many factors that determine interest rates in the bond market. There are short term, intermediate term, and long-term interest rates.

For interest rates, one of the greatest influences is the Federal Reserve Board. It determines the discount rate which, in turn, affects the prime rate for banks. Most loans are dependent upon the prime rate. However, because the Federal Reserve Board meets no more than once a month, this doesn't happen every day.

If you've ever tried to lock-in a mortgage rate, you know how quickly rates change. So, what or who is responsible for the daily rate fluctuations?

Bonds and Interest Rates and Consumers, oh my!

Supply and demand are the cause for ups and downs in the stock market. And individual consumers create supply and demand. So what affects an individual's ability to purchase or creates an impetus to sell?

The bond market has a great influence on the stock market and the economy. The bond market determines interest rates. Bond prices and interest rates have an inverse relationship. As bond prices go up, interest rates go down. As bond prices go down, interest rates go up.

The rise and fall of interest rates directly affect the economy because businesses have to borrow money, consumers have to borrow money, and consumers and businesses have mortgages on property. The higher the interest rates, the more it costs to maintain the debt, and the less money there is to invest.

So, the question arises: What determines interest rates in the bond market?