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What variables are causing the 10 year US treasury yields to rise?
1. Pending GM bankruptcy
2. Fed not stepping in to purchase more MBS
3. Investors willing to spend on the high yield investments
4. Banks profit from the steep yields
2. Fed not stepping in to purchase more MBS
3. Investors willing to spend on the high yield investments
4. Banks profit from the steep yields
voted interesting: williamwaco
answers (2)
Supply and demand. Economics 101.
Bonds are fixed as to interest payments and principal over their life.
If you buy a 1000 bond with a 3% coupon and a one year maturity, you will receive $15.00 after six months. On the maturity date. You will receive 1,015.00.
If demand for bonds is high. An investor might be willing to pay 1,025.00 for this bond. If s/he bought it for 1,025.00 on the issue date, the 'yield' would be $30.00 / $1,025.00 or 2.93%
If perhaps demand is very low, s/he might buy the bond for $975.00. In this case, the yield would be $30.00 / $975.00 or 3.0769%
(This assumes a one year maturity to simplify the math. Do not try this at home for longer maturities. It requires a financial calculator.)
If demand is expected to decline, the investor knows that the value of the investment is going to decline over time so s/he is not willing to pay as high a price as if the demand for bonds is expected to increase.
Thus, the yield on bonds is inversely related to the demand for bonds. If demand is high, prices go up and yields go down.
Now to your cases.
1) The bankruptcy of Government Motors. Has little or no effect on the demand for bonds. So no it is negligible.
1a) However. The bailout of GM is already over $60,000,000,000. That will all be financed by selling bonds. More supply equals lower prices. So yes. the failure and bailout of GM, is driving yields higher.
2) This is a contributing factor. When the Fed buys these bonds, they are buying existing bonds, this action both increases the demand and also reduces the supply since no new bonds were created by the transaction. The Fed's failure to buy more means less demand and no affect on supply so with less demand, prices decline and yields rise.
3) Yes. Investors (meaning people, corporations, institutions, foreign governments) expect the supply to increase dramatically in the near future since bonds will need to be sold to finance two stimulus plans, the TARP, and several other smaller stimulus programs. This will require well over $2,000,000,000,000 in new government treasury securities to be issued. To put that in perspective, China, currently the largest holder of these securities, now holds only one third of this amount. The certainty of this supply will reduce the value of these securities. This means the investors will only buy them at a lower price ( Higher yield )
4) Banks will certainly benefit but this a result of the higher yields, not the cause.
Bonds are fixed as to interest payments and principal over their life.
If you buy a 1000 bond with a 3% coupon and a one year maturity, you will receive $15.00 after six months. On the maturity date. You will receive 1,015.00.
If demand for bonds is high. An investor might be willing to pay 1,025.00 for this bond. If s/he bought it for 1,025.00 on the issue date, the 'yield' would be $30.00 / $1,025.00 or 2.93%
If perhaps demand is very low, s/he might buy the bond for $975.00. In this case, the yield would be $30.00 / $975.00 or 3.0769%
(This assumes a one year maturity to simplify the math. Do not try this at home for longer maturities. It requires a financial calculator.)
If demand is expected to decline, the investor knows that the value of the investment is going to decline over time so s/he is not willing to pay as high a price as if the demand for bonds is expected to increase.
Thus, the yield on bonds is inversely related to the demand for bonds. If demand is high, prices go up and yields go down.
Now to your cases.
1) The bankruptcy of Government Motors. Has little or no effect on the demand for bonds. So no it is negligible.
1a) However. The bailout of GM is already over $60,000,000,000. That will all be financed by selling bonds. More supply equals lower prices. So yes. the failure and bailout of GM, is driving yields higher.
2) This is a contributing factor. When the Fed buys these bonds, they are buying existing bonds, this action both increases the demand and also reduces the supply since no new bonds were created by the transaction. The Fed's failure to buy more means less demand and no affect on supply so with less demand, prices decline and yields rise.
3) Yes. Investors (meaning people, corporations, institutions, foreign governments) expect the supply to increase dramatically in the near future since bonds will need to be sold to finance two stimulus plans, the TARP, and several other smaller stimulus programs. This will require well over $2,000,000,000,000 in new government treasury securities to be issued. To put that in perspective, China, currently the largest holder of these securities, now holds only one third of this amount. The certainty of this supply will reduce the value of these securities. This means the investors will only buy them at a lower price ( Higher yield )
4) Banks will certainly benefit but this a result of the higher yields, not the cause.
source(s):
Personal Experience.
50 years investing in bonds.
Personal Experience.
50 years investing in bonds.
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voted helpful: beast1oh1
I think that it is the law of supply and demand. People and institutions are pulling their money out of Treasuries and moving that money into equities. When the government auctions Treasuries, people and institutions are not offering to buy them unless the yield is higher than it was a few months ago. When the DOW was below 7000, 10 year yields were less than 2.25%. No one wanted to buy equities and everyone wanted to get out of them. Now it has reversed.
How high will it go? I think that 10 year notes might hit 5% by the end of the year.
How high will it go? I think that 10 year notes might hit 5% by the end of the year.
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a. Dollar is falling against the British pound. A weak dollar is reflected in the $68 bar crude oil costs. Yields for 5,10,30 year treasuries have increased 10 basis points, suggesting no divergence between long and short term debt; the whole system is reacting negatively. Euro strengthen against the dollar is not likely to suddenly turn.
b. The Chinese want a higher yield rate, for the debt that is begin financed, as you have stated.
c. The climbing yields suggest demand for the bonds is low.
You have an excellent understanding of the bond market.
Why did you ask the question?
Thanks for the fourteen points.