How does economic growth generally impact yields?

Higher yields are generally associated with stronger economic growth because, when an economy is performing well, investors anticipate higher levels of inflation and increased consumer spending. This leads to a greater demand for credit and capital as businesses invest in expansion and consumers spend more, which can push interest rates up. As a result, new debt is issued at higher yields to attract investors who are weighing the risks associated with inflation and higher borrowing costs.

Moreover, when economic data such as GDP growth, employment rates, and consumer confidence indicators are strong, the market often reacts by pricing in the possibility of tighter monetary policy, since central banks may raise interest rates to manage inflation. This expectation contributes to higher yields on government bonds and other fixed-income securities as investors require a premium for taking on the risk associated with rising inflation and potential interest rate hikes.

In contrast, the other options do not accurately reflect the typical relationship between economic growth and yields. Lower yields would be more likely to occur in a downturn or recession when confidence is low, while an assertion of no impact or stable yields fails to acknowledge the responsiveness of financial markets to changing economic conditions and investor sentiment. Overall, the relationship is nuanced but consistently reflects that stronger economic data tends to correlate with higher yields.