What happens to bond prices when investor confidence in a borrower decreases?

When investor confidence in a borrower decreases, it typically leads to a fall in bond prices. This is because bonds are essentially loans made by investors to borrowers (which can be governments or corporations), and when the creditworthiness of the borrower is questioned, investors perceive a higher risk of default.

As confidence diminishes, demand for these bonds decreases, as investors seek to reduce exposure to potential risks. Since bond prices and yields move in opposite directions, a decline in demand for a bond results in a lower price. Higher perceived risk may also lead investors to demand higher yields to compensate for the increased risk of lending their money, further pushing bond prices down.

This dynamic illustrates the fundamental relationship between credit risk and bond pricing, where decreasing confidence in a borrower directly correlates to falling bond prices.