Bond prices

[Arbu]

So governments are issuing loads of debt, and central banks are buying most of it up. Doesn't that mean that any fundamental factors which should determine bond prices, such as the state of the economy, are largely irrelevant? If a government issues a load of debt the price will drop, if a central bank buys a load the price will rise. So trading bonds is a matter of anticipating what buying and selling activity there is? Which is probably very difficult because I don't think that central banks do much to indicate when they are about to buy.

 

[1nvest]

So governments are issuing loads of debt, and central banks are buying most of it up. Doesn't that mean that any fundamental factors which should determine bond prices, such as the state of the economy, are largely irrelevant? If a government issues a load of debt the price will drop, if a central bank buys a load the price will rise. So trading bonds is a matter of anticipating what buying and selling activity there is? Which is probably very difficult because I don't think that central banks do much to indicate when they are about to buy.

Not sure i completely agree. The state of the economy doesn't determine the price of bonds, its the policies implemented to get it back on track that may affect it. the chief factor being interest rates.

recently, not sure if you heard/read there was potential talk of negative interest rates. bond prices rise when interest rates are low. interest rates have been historically low and set to get lower if things don't improve
then as you said there is a stimulus whereby central banks are buying up bonds, increasing demand...again, bonds going up
this is reflected in historic levels in bond prices. doesn't mean its sustainable, but the push by government will be to increase demand, increase inflation and spending, and to increase spending the number one policy to drive that is to lower interest rates.
so as i see it, bond prices are largely in line with the state of the economy
what isnt necessarily in line, is equity prices. thats where i think we will see a hit. what is often a leading indicator in equity prices is unemployment. yet to hit equity prices, but when it does, and the often inverse relationship between bonds and equity prices...
fun times ahead. right now, trade what you see

 

[new_trader]

So governments are issuing loads of debt, and central banks are buying most of it up. Doesn't that mean that any fundamental factors which should determine bond prices, such as the state of the economy, are largely irrelevant? If a government issues a load of debt the price will drop, if a central bank buys a load the price will rise. So trading bonds is a matter of anticipating what buying and selling activity there is? Which is probably very difficult because I don't think that central banks do much to indicate when they are about to buy.

Yes, Central Banks manipulate interest rates which create all kinds of problems.

 

[Arbu]

Not sure i completely agree. The state of the economy doesn't determine the price of bonds, its the policies implemented to get it back on track that may affect it. the chief factor being interest rates.

recently, not sure if you heard/read there was potential talk of negative interest rates. bond prices rise when interest rates are low. interest rates have been historically low and set to get lower if things don't improve
then as you said there is a stimulus whereby central banks are buying up bonds, increasing demand...again, bonds going up
this is reflected in historic levels in bond prices. doesn't mean its sustainable, but the push by government will be to increase demand, increase inflation and spending, and to increase spending the number one policy to drive that is to lower interest rates.
so as i see it, bond prices are largely in line with the state of the economy
what isnt necessarily in line, is equity prices. thats where i think we will see a hit. what is often a leading indicator in equity prices is unemployment. yet to hit equity prices, but when it does, and the often inverse relationship between bonds and equity prices...
fun times ahead. right now, trade what you see

OK, perhaps the state of the economy wasn't the right example.

But anyway, suppose Bailey says in his speech this afternoon that the BoE intends to introduce negative rates in a couple of months. Bond prices should go right up. But my point is that bond buying by the BoE is so huge at the moment, that the effect of that on prices probably dwarfs the effects of interest rate decisions. The BoE might say "Oh the price has gone up, let's hold off doing any QE for a couple of weeks until it comes back down." The price will then come back down because there's less demand for the bonds. I suppose you could trade the announcement by buying the bonds, but you probably want to get out quickly.

 

[1nvest]

OK, perhaps the state of the economy wasn't the right example.

But anyway, suppose Bailey says in his speech this afternoon that the BoE intends to introduce negative rates in a couple of months. Bond prices should go right up. But my point is that bond buying by the BoE is so huge at the moment, that the effect of that on prices probably dwarfs the effects of interest rate decisions. The BoE might say "Oh the price has gone up, let's hold off doing any QE for a couple of weeks until it comes back down." The price will then come back down because there's less demand for the bonds. I suppose you could trade the announcement by buying the bonds, but you probably want to get out quickly.

i guess, but then bonds is not something that generally moves fast. the problem (in my opinion of course, i mean wtf do i know) is that the bond buying isn't the key reason for bond prices being very high. bonds are high because interest rates have been relatively low since 2009. should we get negative, they will just continue in the same vein. we're practically zero already.
anyway, just my view. part of my portfolio already includes bonds, so im good as they are. when the yield changes, with interest rates increasing, slowly i will be looking for another asset class to hedge equity

 

[0FXTrader0]

Is the Government bond market a ponzi scheme the only way they can repay there old debts with interest is to issue more bonds sounds like a ponzi

 

[MasterOfCoin]

Welcome to the World of Modern Monetary Theory, where you pay off debt with, well, more debt, of course.

 

[new_trader]

i guess, but then bonds is not something that generally moves fast. the problem (in my opinion of course, i mean wtf do i know) is that the bond buying isn't the key reason for bond prices being very high. bonds are high because interest rates have been relatively low since 2009.

I think you have the cart before the horse. Central Bank buying has artificially propped up bond prices in order to keep interest rates low. This is effectively what the US FED'S POMO program is all about.

 

[Arbu]

OK, so on Wednesday, Powell said the Fed had to be "patiently accommodative", i.e. it's going to buy more bonds. The price did go up from 7pm UK time, when he made his speech until about 8am the next day. Since then it's been coming down, i.e. reverting to the trend of the last few months. So it's like the fundamentals do work, for a bit, and then the fact that the Treasury is going to issue loads of bonds whatever causes the price to carry on heading down.