Election Year And Bond Market Trends
| Financial markets including bonds, stocks and FOREX are heavily influenced by the economic, social and political scenario of a country. Fluctuations in the financial markets are even more prominent during the year of elections. |
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Investment strategies and debt portfolios of a country are controlled and managed by the Government of that particular country. Any change in governance can result in a profound change in these portfolios. Therefore, international investors react very promptly to cabinet reshuffles which affect the ministry of finance or economy.
According to a study conducted by financial experts like Robert Johnson, Scott Beyer and Gerald Jensen, returns from stock and bond markets were higher and less volatile during the period of political harmony where only one single party holds dominance in the White House and Congress in the United States. Similarly, it holds true for all other countries. In situations of a political turmoil or divided government, there is less scope for spending. Hence, bonds offer higher yields than stocks.
It has been noted in several instances that there is an immediate rise in bond prices on the day of the pronouncement and they continue to rise steeply for the rest of the 40 days before the election and soon after the election is over, the bond spread shows a dip or levels out. This market trend is mainly due to the risk factor involved which is usually higher after a cabinet reshuffle. Events like elections or other forms of political instability in a country often have a strong impact on economic vulnerability, especially for those countries which have low international reserves.
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Election Year And Bond Market Trends