What is a primary focus when forecasting nominal default-free bonds?

When forecasting nominal default-free bonds, the primary focus is on the government yield curve. The yield curve represents the relationship between interest rates and the time to maturity for government debt securities, which are considered risk-free benchmarks. It provides essential insights into market expectations regarding future interest rates, economic growth, and inflation.

The shape and movement of the yield curve are critical because they affect the pricing of nominal default-free bonds. Investors often use the yield curve to assess the overall health of the economy, as shifts in the curve can signal changes in monetary policy or economic conditions. A steepening yield curve, for example, might indicate expectations of rising inflation and interest rates, which directly impacts bond pricing and investor returns.

While factors like corporate performance indicators, market volatility, and inflation rates can influence the broader bond market, they are secondary when it comes to forecasting the behavior of nominal default-free bonds specifically. The yield curve stands out as the most crucial component, serving as a fundamental tool for understanding interest rate movements and making projections related to nominal bonds.