According to an article in the Economist about interest rates on European government bonds in 2016, investors were concerned that “European equities are almost 20% below their levels of a year ago; commodities have plunged in price; the default rates on corporate bonds are rising.”
a. Would the factors listed in the article be expected to affect the demand or the supply for European government bonds? Briefly explain.
b. Holding other factors that affect the market for European bonds constant, would the result you identified in part (a) be likely to cause the interest rate on European government bonds to increase or to decrease? Use a demand and supply graph for the market for European government bonds to illustrate your answer.