In the Handbook of Fixed Incomes Securities, there is this part:

The lower federal funds rate prods banks to be less aggressive in issuing deposits, such as certificates of deposits (CDs). Their rates drop, bringing down other money market interest rates which compete with CDs and other bank deposits. Investors, now searching for higher rates, extend along the yield-curve. This pushes longer-term rates lower. Furthermore, with interest rates having fallen, investors maybe more willing to accept credit risk as they seek to replace yield in their portfolios. Risk spreads on corporate bonds narrow.

I don't understand why lower rates will change investors mind if credit ratings of companies didn't change ?


1 Answer 1


As Federal interest rates decrease people who want to get yield are required to take on more risk. Thus they bid up more risky assets which decrease their yield and subsequent spreads. When rates are higher people get more yield from less risky instruments so they sell the more risky. The reason why people want higher yield is for retirement, investors, etc.

  • 1
    $\begingroup$ Oh, makes sense, didnt read it that way, thanks ! $\endgroup$
    – TmSmth
    Aug 26, 2019 at 16:47

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