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As such you may be tempted to believe that human emotion would play a role in determining the prices of bonds, and you would be right. If the buyers or sellers believe that the value of the bonds are or will be higher than their current levels, prices would certainly rise. The reverse is also true. Bond prices fall if buyers cannot justify paying for them at current prices. To generalize, essentially all financial markets must grapple with human psychology. This should be an obvious point, since after all financial markets are made up of people trading financial instruments. Prices rise and fall in response to people’s sentiments, which are at times driven by facts and other times by rumors. But nowhere is human sentiment more evident than the stock and bond markets. Perhaps this is due to the large number and variety of people participating in these markets. More on this when we cover the stock market.

Some of the factors affecting bond prices include:

Economic News
Bonds are very sensitive to economic and political news. The news could include new figures for one or more economic indicators (covered previously), Fed policy decisions, or foreign market moves. The slightest hint of an unexpected direction with the economy could have considerable impact on bond prices. In a healthy economy expanding at a moderate rate, bonds offer a relatively stable investment for a diversified portfolio. Their prices change slightly depending on the economic news, but overall the long term investor is immune to large price fluctuations. Forecasts of moderate economic expansion would be good news for bond holders. In other words, an economy that is not too hot and not cool. Bond prices always rally on the heels of this kind of news. Bad news, on the other hand, would include inflationary …