Interest rates question
Recently started learning econ. Obviously this is probably not how the real world works, but I'm trying to see if I'm heading in the right direction. Appreciate your feedback!
1) "Treasury yields rise on stimulus package rumors."
- If there is a stimulus, there might be inflation in the economy
- If prices of goods/services rise, central bank will try to fight it by raising interest rates
- As a Treasury investor, higher interest rates means lower bond price (because my bond will not be as attractive an investment), so if I expect this to happen in the future, it is a good idea to sell my bonds now
- If a lot of Treasury investors think the same, there will be a selloff, causing yields to rise (selloff = bond prices fall = % return on that bond rises)
2) "Treasury yields fall on weak inflation data."
- Initially people expected inflation (and therefore higher interest rates), so they sold their treasuries fearing that the bond value will decrease
- If inflation data shows that previous fears were overblown, they no longer think interest rates will rise that much in the future
- Therefore, their bonds will not lose as much value, and there will not be a bond selloff in the future
- This makes bonds a more attractive investment, and more people buy treasuries, leading to treasury prices rising and treasury yields falling.
Yep, this is right.
It all comes down to the Fed - which has said they won't raise rates until around 2024. But bond investors are still positioning themselves for an earlier liftoff, basically betting that inflation will force the Fed's hand to hike rates before projected.
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