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It's a little more complicated than that. Treasury bonds are actively traded on secondary markets. The 'price goes down, yield goes up' generally refers to se
by pyoung 15y ago
It's a little more complicated than that. Treasury bonds are actively traded on secondary markets. The 'price goes down, yield goes up' generally refers to secondary markets. The concern for the U.S. govt isn't the secondary market. It is the primary market where they auction off bonds to raise money to fund operations. In the primary market, the U.S. treasury issues a certain number of bonds in order to raise a specified amount of money. Investors bid on the bonds, and the best bid (i.e. lowest interest rate) wins. With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates.
- noagenda 15y agoUS government doesnt sell bonds to fund operations, it is never revenue constrained (because the US dollar is a non-commodity backed, floating exchange rate, fiat currency). It sells bonds to remove dollars from the system.
- jpdoctor 15y ago> US government doesnt sell bonds to fund operations Yes it does. > It sells bonds to remove dollars from the system. No. The Fed is in charge of the money supply, and when they sell bonds, dollars are removed from the system. The US Govt selling bonds actually increases various measures of the money supply.
- jpdoctor 15y ago> The 'price goes down, yield goes up' generally refers to secondary markets. No. It also refers to the bidding process when the US Govt goes to initiate the sale of bonds. Regarding the rest: Yes, that is why I included "more or less" in my original post. The bidding for new bonds and the pricing of old bonds is quite close in most circumstances. (If they are not close, then there is usually trouble.) > With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates. Regardless of the details above, we both get to the same place.