What will happen to bond prices if terrorism ended and the world’s nations unilaterally disarmed and adopted free trade policies?
If terrorism ended and adopted free trade policies, that make people feel safe, stable, and expect the economy will be booming in the near future. Therefore, they tend to transfer their safe assets to some risky ones, like sell their Treasury bonds and buy stocks. Or, even sell their gold in the safe that purchased during the risky period, to buy flight tickets, pay for their travel plan. Overall, the bond prices will go down due to the lower demand.
But, what if the government increased their issuing of bonds to win the war? After the terrorism, the government will be tossing and turning when their lenders, their people want their money back. To solve the problem, the government can just issue more bonds and that looks like you pay your short-term debts by creating a longer one. That will lose people's trust and causes even lower demand.
The free trade policies will stimulus business owners to expand their business and causes the money demand to go up since they need more money to invest in their new business. Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.(Barone, 2020) Firms will tend to issue new bonds to raise their capital and causes the supply of corporate bonds to go up. The corporate bonds are an alternative choice for Treasury bonds or any other bonds, so the increase in corporate bonds supply will affect the bond prices of the other types. But the Treasury bonds have often been regarded as a safety one, corporate bonds are relatively risky. In the bonds market, different types and terms of bonds will be very different in price changing. Some will go down, but some will not.
Reference
Bond Prices, Rates, and Yields. (n.d.). Retrieved September 12, 2020, from https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/bond-prices-rates-yields
Barone, A. (2020, August 28). How a Free Trade Agreement (FTA) Works. https://www.investopedia.com/terms/f/free-trade.asp.
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