When is the call feature on callable bonds most relevant?

The call feature on callable bonds becomes most relevant when the economy is experiencing a slowdown because this typically coincides with falling interest rates. When rates decline, issuers of callable bonds may choose to redeem (or "call") the bonds early in order to reissue new bonds at a lower interest rate, effectively reducing their cost of borrowing.

During an economic slowdown, the demand for debt becomes more favorable for companies looking to manage their financial obligations. Thus, if a callable bond is in place, the ability to call the bond allows an issuer to capitalize on current market conditions. Holders of the bond may have to reinvest their principal at lower rates, which could lead to decreased income.

In contrast, when the economy is growing rapidly, interest rates tend to rise, making it less advantageous for issuers to call bonds since they would incur higher borrowing costs if they sought new funding. Similarly, when inflation is rising, investors expect higher future interest rates, which again diminishes the appeal of calling existing bonds. Therefore, the call feature is most tactically utilized during economic slowdowns.