A very simple way to price a bond is you add what you expect inflation to be whilst you hold the bond together with a risk premium for holding it. This can be related so if you are holding a bond in a country that has relatively high inflation then the risk premium will also be higher.
I was going to wax lyrical on what occured in the US bond markets and why but Noah Smith beat me to it.
The key point to understand here is when the stock market tanks bond prices rise and thus bond yields fall. However last week in the USA they rose. The other important point to note is when the tariffs were announced and later the $US fell. It should have risen.
Both things occurred because of a lack of confidence in Trump and his decision making. Investors have no confidence in him thus they do not want to hold US denominated assets.
It COULD mean the beginning of the end of the $US as the world's reserve currency.
Investors know tariffs do not cause nor fix trade deficits. They also know the 'formula' to impose the tariffs was very mickey mouse. They know trade deficits do not make a country poorer.
No comments:
Post a Comment