I “know” the relationships between bond prices, the yield, and when individuals buy bonds vs. sell them, but I don’t really understand it all. In particular, what I don’t understand is how all this works together. My understanding is that when individuals have excess money they buy bonds. Now, since there has been excess money in the economy, one would assume that IR are high (an inflationary expansion period) and as a result these individuals will get a solid return for their money. Thus, as more and more people buy these bonds they become a hot item, increasing the demand and lowering the price. BUT, aren’t these bonds in a limited supply, thus leading me to believe that the increase in demand should actually cause an increase in price? Or am I just completely wrong there? Now, while all this is going on the IR are dropping. Why? How do people buying bonds cause the interest rates to fall? I think it’s this concept that’s really stumping me. I understand the bond yield curve and the inverse relationship between bonds prices and yields, I just don’t understand what causes the movement. Hopefully that made some sense.
I only read your last paragraph. When people buy bonds, there is a surplus of cash available. If there’s lots of cash available, the borrower who issues the bond will lower its interest rate because there will be a buyer of the bond anyway. Lots of buyers -> lower price -> lower yield -> lower interest rate. Now if there was anything in the first two paragraphs I should have read just let me know.
Is it not the following: Buyers or Demand is high therefore Higher price and lower yields? Interest rates are only effected by the FED. Correct me if i’m wrong.
You’re overrating the Fed…
As I understand, because there is excess money supply, there is a drive for corporations and households to buy securities such as bonds, INCREASING the price of the bonds and reducing their yields (or interest rates). Another way of looking at it is that since money is in excess supply, banks (and corporations) can easily find money from investors, meaning the interest that they offer to pay is lower (as people will compete to buy these bonds).
Thank You! Everything is clear all now.