The Economist explains: Why markets obsess over bond yields

Posted: August 25, 2016 in economy
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IN 1993 James Carville, an American political operative, quipped that should reincarnation turn out to be real, “I want to come back as the bond market. You can intimidate everyone.” Today, bond markets are more powerful than ever. Traders, politicians and financial journalists keep constant watch over bond yields as they wobble up and down. And when a missed budget forecast in Portugal sends its bond yields soaring, or unexpected murmurs from a Federal Reserve governor cause Treasury yields to tumble, the reaction from all three can be immediate and dramatic. But just what is a bond yield and why does anyone care how it moves?A bond is a financial security which allows a government or firm to borrow money from markets. Bonds come in many different varieties. The most common sort entitle the owner to occasional interest payments and the return of the principal on a specified maturity date. The governments or firms issuing the bonds typically auction them off, and buyer appetite determines the interest rate the bond carries. Once out in the wild, bonds change hands repeatedly. As they do so the interest payment and maturity dates remain constant, and changes in demand are instead reflected in movements in the price; someone who bought a bond for $1,000 in March might sell it for much more or less in August. Because different bond vintages might carry slightly different …

via Economic Crisis


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