What factor typically raises yields when there is stronger economic news?

Higher anticipated future inflation typically raises yields in a stronger economic environment due to the relationship between inflation expectations and interest rates. When economic indicators signal growth, investors often anticipate higher inflation rates as increased consumption and investment put upward pressure on prices. As inflation expectations rise, lenders demand higher yields on bonds and loans to compensate for the eroding purchasing power over time.

Central banks may also respond to stronger economic data by signaling potential interest rate hikes to combat inflation, which further increases yields. Meaning, if investors foresee that the economy will continue expanding, they might adjust their expectations about the future direction of interest rates and inflation, resulting in increased long-term yields on securities.

In contrast, decreased demand for credit, lower investment in capital goods, and increased government spending may not have the same direct impact on yields during an inflationary environment. Decreased demand for credit could lead to lower yields due to increased supply of funds. Similarly, lower investment in capital goods typically suggests a slowing economy and might lead to lower yields. Increased government spending may initially boost economic activity but does not necessarily correlate directly with rising yields unless it stirs inflationary concerns.