Government Bond question
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The lower the inflation rate, the more advantageous it is to be a lender. A buyer of nominal government bonds is a lender (with the government being the borrower).
Not sure what you're confused about, and I'm not trying to be a smart**s. That said, the US bond market in inextricably tied to the global FI (fixed income) markets. When the government gets into the business of buying treasuries, they are working to control the inflation rate. Buying bonds equates to allowing more money to enter the economy, whereas selling bonds has the opposite effect.
Please forgive me if I'm explaining something that is common knowledge to the general public on these boards, but a bonds yield is inversely proportionate to the price of the bond. As bond prices drop, yields rise, and vice versa. So, when there is a great demand for bonds, or when the government wants to remove liquidity from the economy, they sell government bonds. When they want to stimulate the economy, they buy bonds.
Regarding your question about the last sentence in the quote above, the Fed uses several different interest rate tools: Prime rate, fed funds rate, discount rate, etc. to help them control inflation and the associated money supply. As inflation falls, the government tries to remove money from the money supply (which means they buy bonds back so that more money is introduced into the system). When inflation is low, especially global inflation, governments around the world work to remove money from the system the same way, by buying their government bonds (or in many cases, US bonds, as we are a surrogate for the world economy, and we are one of the safest bets in the world). US gvmt bonds are backed by the full faith and credit of the US Government. So, as long as the US is still solvent, bondbuyers will get their money back upon maturity as well as the semi-annual interest payments.
Hope I didn't get too deep into the minutiae and hope I explained it well enough to be easily understood. Just remember, when inflation is low, governments try to spark growth by introducing more money into the market so that people/corporations have more money in their pockets which will eventually work its way into the overall economy, eventually increasing inflation.
Please advise if there is something that confuses you about this explanation.
No offense, but, apart from being somewhat all over the place and confused, this post contains some factual inaccuracies...
In the majority of advanced economies, it's not the government's job to "add or remove liquidity" from the economy. That's the function of a Central Bank. The government, however, normally does sell bonds, but for an entirely different purpose. The government almost never would buy bonds and certainly not to stimulate the economy.
The Prime rate isn't one of Fed's interest rate tools.
As inflation falls below the Central Bank's threshold, it (and not the government) may engage in asset purchases, which will have the effect of creating bank reserves and possibly adding to money supply.
When inflation is low, a particular central bank, not governments, may work to "add money to the system", not remove it, by engaging in asset purchases.
With very few specific exceptions, no central bank would dream of buying non-domestic government bonds as part of a monetary policy asset purchase program.
Martin, I was being very general in nature. Yes, officially, the Fed is not "the government". I was simply trying to convey the tools that the Fed, and central banks in general, use to control monetary supply, and use the monetary supply as a means to control inflation. There are myriad issues that impact rates, including the value of the dollar, trade deficits, ECB rates, bond yields, and many more.
We can certainly get into very specific details about the M1, M2 and M3 monetary supply, the specific tools the Fed uses at the discount window as opposed to the overnight fed fund rates, short-term versus long-term yield curves, or fiscal tools that the US government uses to address inflation (tax and spending).
Would like to know what is "all over the place, factually inaccurate, or confusing. Happy to get into details.
Surprised about your response about other governments not buying our debt. China is the single largest holder of US government debt in the world. What do you not understand about this? This has been a major concern regarding our national sovereignty for years.
To the point: The U.S. debt to China is $1.2 trillion as of November 2017. That's 19 percent of the $6.3 trillion in Treasury bills, notes, and bonds held by foreign countries. The rest of the $20 trillion national debt is owned by either the American people or by the U.S. government itself.
I have pointed out the specific bits which are factually inaccurate in my previous post.
Yes, we can certainly get into the details, but I don't think you really would want that, to be honest. I would certainly advise you against that.
China's purchases of US treasuries are NOT directly part of PBOC's monetary policy and especially not "when inflation is low", as you stated in your previous post. China's purchases and sales of USTs are performed as part of reserve management predominantly by SAFE. Confounding reserve management and monetary policy is one of the things which is confused in your posts (and I do mean "confused", rather than "confusing").
I made zero mention of PBOC's monetary policy, made zero mention of when China chose to buy our debt, and made zero mention of SAFE. I simply pointed out that foreign governments, NOT just China, DO buy our debt. Don't understand what is confusing about that remark.
Already agreed I was not specific with regards to the various monetary and fiscal tools at the disposal of the Fed and/or the government. And yes, the prime rate is NOT set by the Fed or the government.
It seems we are getting wrapped around the axle over minutiae. Officially, the prime rate is not set by the Fed. However, many banks do use the fed rate to set their own specific prime rate.
Not trying to be confrontational, and certainly not attempting to be an internet bully. Would be happy to continue the discourse, although I'm not sure what good it will do. We're bantering over semantics at this point.
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I don't really like the question, it's not too clear
"government bonds?" are we talking 30y bond or 2y year notes?
If inflation is low, like it has been, the demand for FI in general will rise, since there is less inflation risk
but also, lower inflation, lower yields, also spurred demand for riskier assets like equities and HY (credit in general)
Sort of tricky questioning comparing text-book answers to practice
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