First, lower yields make bonds more attractive to investors. When yields fall, the price of existing bonds goes up. This means that investors can make a profit by buying bonds and then selling them when their price has risen.
Second, lower yields make stocks more attractive to investors. When yields fall, the cost of capital for companies decreases. This means that companies can borrow money more cheaply, which can boost their earnings. As a result, investors are more likely to invest in stocks, which drives up stock prices.
Third, lower yields can signal that the economy is slowing down. When the economy is slowing down, the central bank is more likely to lower interest rates in order to stimulate economic growth. Lower interest rates can lead to higher inflation, which can also boost stock prices.
Fourth, lower yields can make riskier investments more attractive to investors. When yields fall, investors are looking for other ways to generate returns. This can lead to increased investment in riskier assets, such as stocks, commodities, and emerging markets.
Overall, lower yields can have a positive impact on investor sentiment. This is because lower yields can make a variety of investments more attractive, including bonds, stocks, and riskier assets.
Here are some specific examples of how lower yields can lift investor spirits:
A pension fund manager may be able to increase the expected returns of their portfolio by investing in more stocks and bonds with lower yields.
A hedge fund manager may be able to generate higher returns by shorting the US dollar and investing in Japanese yen, which has a lower yield.
A retail investor may be able to increase the value of their investment portfolio by buying stocks of companies that are expected to benefit from lower interest rates, such as banks and utilities.
In general, lower yields can lead to a more bullish investment environment. This is because lower yields can make a variety of investments more attractive, which can lead to higher asset prices and higher returns for investors.