For all the regards who have no clue what’s all this Bonds and Yields talk driving the markets

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by flying_cofin

Listen up regards, here is some quick 101 for you who don’t have slightest clue what’s driving the markets and why we are seeing all this news suddenly on Bonds and Yields:

  • Fed led by Papa pow printed a lot of money during Covid.. like a fuck ton of money and used it to buy US Treasury securities like (T-bills, T-bonds and T-notes). These are debt instruments on which US Government will pay them interest.
  • Post-pandemic we got hit by Inflation that turned out to be not so transitory due to Covid supply shocks (including factory closures), Russia invading Ukraine, Above mentioned money printing that was given as aid to US citizens and a host of other factors.
  • Fed has only one tool in its toolbox to tame Inflation.. Higher interest rates. It hiked from near 0% to 5% in a matter of 18 months. Practically unheard of in modern history. The previous hike in rates like this was done by Fed chair Paul Volcker.. the guy with the balls so strong and heavey, he had to weigh them using a truck scale. Seriously, search him on Google.
  • Higher rates mean the previous bonds sold with lower interest rate lose value. If US treasury sells a bond that pays 1% interest for 10 years with $100 face value, and then due to higher interest rate US treasury sells you another note that pays 2% interest for 10 years with $100 face value, the previous note that pays lower interest goes down in value due to higher interest rates on the newer treasuries. So the return a bond gives a.k.a Yield goes higher when the bond prices go down and vice versa.
  • Fed hiking rates and keeping them higher for longer mean bond traders are fearing the higher rates for longer and selling off 10 year US treasury securities. Japanese institutional investors are selling US treasury securities, Fed themselves are selling Treasury securities that they purchased during Covid to reduce size of their balance sheet and US Government is also selling US Treasury securities in open market to fund debt.
  • This has caused 10 Year US treasury Yields to spike and hence any debt including Corporate bonds, Mortgages etc. will have to be funded using higher interest rates restricting growth of economy. Corporate Bonds are also having a major selling off due to higher yields. Higher yields also signal higher interest rates which mean Present value of future earnings goes down. Stocks are hating this and falling. Nobody knows what is going to happen next but tighten your seat belt bois as the ride is going to be bumpy.
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TLDR; Papa pow printed a lot of money and purchased US treasuries. Inflation and higher interest rates by Fed to tame inflation mean treasuries decline in value and traders and institutional investors holding them are selling it. Fed is selling them to reduce their balance sheet and US government is selling them to as part of their debt funding. This is causing the 10 year yields to spike and stocks to go down. Strap your seat belt bois, it is gonna be a bumpy ride for next few months.