This week (7-03-09) there were several US Government Bond auctions. These are important to watch because the results from the auctions can give us a good idea of important economic indicators such as inflation, US deficits, and the US government's credit worthiness.
Here is how we examine the results of bond auctions. Bonds are denominated in two ways: the price and the yield. If the price goes up then the yield goes down, and vice versa. The easiest way to examine a bond is by the price. If you see that the price goes up (or the yield goes down) than you know that either the demand for the bond went up or the supply went down. This follows the same supply and demand idea as any other product you may purchase. So lets say the price does go up and the yield goes down. What implications could this have? First, it tells us that more people want bonds. These "customers" of the US believe a) that the US government will be able to pay them back and b) that inflation will not increase too much above the yield that they recieve the bond.
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About this quote: "If the price goes up then the yield goes down"
ReplyDeleteThis would mean that Bonds are always sold at the same net price, right? If bonds are subject to the same supply and demand forces that other products are, should the net prices go up and down depending on supply or demand?
Like, if the treasury decides to sell a lot more bonds than usual, without a change in anything else, then the net price should fall (as in the price would go down without a corrisponding offset in the yield (or vice versa)).
So I read elsewhere on the web that the 10 and 30 year note auction went well for the treasury. Would you say that this is a case where people think the US government is doing really well, or that all their other options (stocks, and such) are just going to keep doing really badly?