Regarding US Treasuries (long term US bonds), China and other foreign big banks are buying up less than previous years. As a result, the US government has raised the rate and yield of long-term bonds — My question is, does an increase in rate and yield of bonds make it more attractive for private investors? (Because, they will get a higher return on their money). Please explain how this works Thanks!
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Paul 9:04 am on May 30, 2010
"As a result, the US government has raised the rate and yield of long-term bonds — "
Actually, that’s not how it works. When the US Treasury issues new paper, it does so through an auction process. The price of a given bond at these auctions is determined by what the primary dealers are willing to pay for them and that is in large part determined by activity in the Treasury bond secondary market as a whole. When prices are bid down to the point that a higher coupon is acceptable, then the new issue paper is released with a higher coupon. The coupon on the 30 year was just recently raised from 4.5% to 4.625%. When prices are bid up, the reverse occurs. In February of 2009, Treasury issued 30 year paper with a 3.5% coupon.
"My question is, does an increase in rate and yield of bonds make it more attractive for private investors? (Because, they will get a higher return on their money)."
Well sure! What would you rather get? Interest payments of $45.00 a year for each bond you owned or $46.25?
UnclePug 9:04 am on May 30, 2010
Increase in bond yield drives the principal price of older lower interest bonds downwards. The question you have to ask is, where will interest rates be at the maturity date of the bond I am thinking of buying. If rates will be higher, then tying down my money in a bond not keeping up is less attractive, so the price comes down. If the rates will be lower, then rock on! I’ll buy the bond and hold it. This actually happened in the late 70s, when Treasury was selling bonds yielding 12% and up. When interest rates came down in the mid-80s, those bonds were recalled and paid off.