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iShares TIPS Bond Message Board

  • irvhal irvhal Mar 19, 2011 7:11 PM Flag

    Interest Rates & Japan

    There's now talk that Japan might be forced to sell some of its U.S. treasury bonds for cash to meet forthcoming needs, and that such action would precipitate an interest rate spike in America. But would it? Selling its bonds to other holders would change bond ownership but not supply. And other things equal, there'd be no additional money created to chase American goods. Moreover, our depressed economy certainly has excess capacity to meet Japanese orders -- which isn't amenable to inflationary expectations that raise rates. Any thoughts?

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    • The Law of Supply & Demand Applies...fewer buyers (JAPAN OUT) and more product on the market (Normal Treasury sales AND JAPAN sales) make for a rising rate to sell the EXTRA product to a fairly CONSTANT number of buyers, i.e. more binds to sell to the same number of buyers. To get them to buy more stuff, it has to be made more interesting, thus higher interest rates.

      • 1 Reply to Tom_Colangelo
      • Assumptions about less bond buyers raising rates assumes that the government issuer of future bonds (leaving aside U.S. savings bonds)is a rate (or price) setter, rather than a rate (or price) taker. But treasuries' rates at issue are set by buyers' bids. Moreover, the security begot by the full faith and credit of the U.S. government begets lesser rates than more risky private bonds. Does it not? Of course, given that investment capital is finite, we can assume that a preference for government securities might raise rates for bond issues in the private sector. But the focus here is on treasuries.

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