Textbook is Bond yield goes up, Bond Prices go down, so does demand.
But when US Bond yield goes up, demand for them is higher, foreign investors will buy Dollar to buy these higher yielding bond. Which is contradictory to the above statement.
Is it because, the foreign demand for US bond is relatively small compared to domestic demand?
In: Economics
There are many factors that affect Treasury yield, not just foreign demand.
In this case, though, I think you are mistaking how the equation works.
When the bond yield goes up, the prices for the existing bonds go down, because their existing interest rates have to be able to compete with the new yields.
If I have cash to invest in a new bond today however, then whether I’m foreign or domestic, that Treasury at increased yields is more attractive than it used to be at lower yields. I’m not a foreign investor, but those who are will be attracted to the new, higher rates.
I don’t think you have described the mechanism of supply and demand correctly.
If yields rise (or more correctly the interest rate set by central bank rises and the market expectation of future interest rates rises accordingly), then bond prices fall to reflect that. If they didn’t fall, demand would vanish (because purchasing them at their previous price would not offer the yield that could be obtained by investing in other interest-bearing assets), so prices have to *fall* to *increase* demand (that’s the basic economic principle that demand for a good increases as its price falls), until there is an equilibrium with supply (ie sellers of the bonds are only willing to drop the price to a point where they could reinvest the proceeds to replace their previous returns which they can do because yields have risen).
Latest Answers