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To: Principled
Well, you are correct that yield change offsets any decrease in value, but it does not add value to people already owning a bond. Only to people who would buy in after that date. But placing something at market return is basically the same as changing the yield, since that is how the market determines the proper return. But it will be more attractive to new investors:

Think of it this way. You are thinking of buying a government bond at $99 that will be worth $115 when you add up all the interest to be paid over the years and the face value. You think it's a sound good investment, but you don't want to pay that much. Then the Chinese government sells all their US Treasury Bonds, and the bond that was $99 is now $95 (more drastic a price change than would occur, but for the sake of argument...). What would have been a return of $16 turns into a return of $20. Suddenly you are more likely to buy that bond, because it is more attractive, assuming the financial soundness of the US government is still the same as before the Chi Coms sold. Now, the poor sap who was bought the bond at $99 is out $4, so he loses value.

Where it wouldn't be bid back up would be if it was bid down based on economic fundamentals (I.E., rising inflation) or on the financial soundness of the U.S. Government. However, with the US Treasury bonds, it is doubtful that it would be bid down on problems of financial soundness, since US Treasuries are considered de facto risk free investments.

Any change in price based on economic or fundamentals actually represents the correct net present value of the investment. Any change in price based on China dumping $81 billion in a single day represents a short-term shift in supply, which will be corrected.

68 posted on 07/30/2002 8:33:16 AM PDT by Thane_Banquo
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To: Thane_Banquo
Think of it this way. We're saying the same thing.
71 posted on 07/30/2002 1:05:59 PM PDT by Principled
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