In today's Wall Street Journal, the article "Treasurys' Swoon Doesn't Rattle Debt Investors" (http://www.wsj.com/articles/treasurys-swoon-doesnt-rattle-debt-investors-1435195058) has a great discussion of the reasons for (and against) a Treasury bond selloff. This information ties directly into our discussion of bond prices and yields in Chapter 7.
If investors believe the economy is recovering, they will sell bonds. This will put downward pressure on the bond prices and raise their yields. The article implies that this has been happening, albeit slowly. In turn, this indicates that investors at large are not convinced the economy is recovering fast enough to leave the security of Treasuries (many investors invest in Treasurys for their relative safety), partly driven by inflationary fears and other considerations.
One potential drawback of a massive selloff in government debt that is ignored by the article is that there may be a mass exodus from government debt once the selloff starts. While higher yields may be attractive to new investors in debt, a sudden and pronounced drop in prices may lead current investors to sell their Treasurys before prices go even lower.
I am not convinced, given the current economic data, that interest rates should be raised. However, one advantage of raising rates is that they can be lowered if things get worse. We have pretty much exhausted all other (monetary) avenues of stimulus.
If investors believe the economy is recovering, they will sell bonds. This will put downward pressure on the bond prices and raise their yields. The article implies that this has been happening, albeit slowly. In turn, this indicates that investors at large are not convinced the economy is recovering fast enough to leave the security of Treasuries (many investors invest in Treasurys for their relative safety), partly driven by inflationary fears and other considerations.
One potential drawback of a massive selloff in government debt that is ignored by the article is that there may be a mass exodus from government debt once the selloff starts. While higher yields may be attractive to new investors in debt, a sudden and pronounced drop in prices may lead current investors to sell their Treasurys before prices go even lower.
I am not convinced, given the current economic data, that interest rates should be raised. However, one advantage of raising rates is that they can be lowered if things get worse. We have pretty much exhausted all other (monetary) avenues of stimulus.
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