What often indicates a stronger economy in relation to bonds?

Higher yields on bonds typically indicate a stronger economy. When the economy is performing well, investors often expect interest rates to rise as a result of increased demand for credit. In a robust economic environment, companies and consumers are more inclined to borrow money for expansion and spending, which drives interest rates up. As interest rates increase, existing bonds with lower interest payments become less attractive, leading to higher yields on new bond issues to attract investors.

Conversely, in a weak economy, yields tend to fall because the demand for credit decreases and investors seek safer, fixed-income investments, resulting in a decline in bond prices. Therefore, higher yields are usually associated with confidence in economic growth, while lower yields tend to reflect uncertainty or contraction in the economy.