Impact of the Trade Deficit Bond portfolio managers closely monitor the trade deficit figures, because the trade deficit can affect exchange rates, which can affect inflationary expectations and therefore interest rates.
a. When the trade deficit figure is higher than anticipated, bond prices typically decline. Explain why this reaction may occur.
b. On some occasions, the trade deficit figure has been very large but the bond markets did not respond to the announcement. Assuming that no other information offsets the impact, explain why the bond markets may not have responded to the announcement.