(no subject)
I just figured out why bond yields are better when interest rates fall. I figured it out with logic!
If there is a lot of spendable money in the pockets of the private sector (liquidity), then demand for loaned money is low (because people don't need debt if they have ready cash, OR like now if the economy is slowing down people don't want to take on debt, they would rather keep what assets they have liquid). People will not borrow what they don’t need very much at high interest rates, so interest rates are also set low to motivate borrowing (because that is how the banking industry makes money -- and incidentally, how the state makes money also: on the creation of new money when public demand rises). Excessive liquidity in the private sector can be caused by government failure to recover its spending through the sale of securities (and when the relationship isnt causal it still correlates, because money is essentially a pre-issued tax credit). In other words, the government has paid more tax money into purchase of goods and services from the public than it has collected in taxes, and it has not offered enough securities for sale to make up the difference. The Treasury’s demand for dollars from the sale of securities is high, so buyers are able to bid up the yield demanded on the securities they agree to buy. When the Treasury needs money more badly than the public, the public can set the price at which the government borrows from us (rate of return on bonds).
Go logic!!
If there is a lot of spendable money in the pockets of the private sector (liquidity), then demand for loaned money is low (because people don't need debt if they have ready cash, OR like now if the economy is slowing down people don't want to take on debt, they would rather keep what assets they have liquid). People will not borrow what they don’t need very much at high interest rates, so interest rates are also set low to motivate borrowing (because that is how the banking industry makes money -- and incidentally, how the state makes money also: on the creation of new money when public demand rises). Excessive liquidity in the private sector can be caused by government failure to recover its spending through the sale of securities (and when the relationship isnt causal it still correlates, because money is essentially a pre-issued tax credit). In other words, the government has paid more tax money into purchase of goods and services from the public than it has collected in taxes, and it has not offered enough securities for sale to make up the difference. The Treasury’s demand for dollars from the sale of securities is high, so buyers are able to bid up the yield demanded on the securities they agree to buy. When the Treasury needs money more badly than the public, the public can set the price at which the government borrows from us (rate of return on bonds).
Go logic!!