July Inflation | Page 5 | General financial discussion | Discussion forum

Japan has been doing QE for years, started before everyone else and on a bigger scale. Manipulation appears to have reached its limit: nobody buys Japanese bonds except the government of Japan. So new attempts to create money end up in money transfer from one government pocket to another. And the inflation is still low.

The lesson is that QE, if overused, fizzles out. Mr Market wins.

Vatox said

You are jumping around my question. Why would the initial buyers accept a lower coupon rate without the CB lowering the Bank Rate? Don't think in terms of secondary bond market trading.

Stop doing brain dumps.  

I am trying to tell you the Bank Rate has absolutely NOTHING to do with bond rate or coupon or yield or whatever you want to call it. Its not a brain dump. Its simply you dont understand what bank rate, prime rate, bond coupon/yield really means and how it works in the market.

Read up on what term structure of interest rate and yield curve means....

Vatox said

I read that. It refers to the nature of the yield curves and long term bonds versus short. It has nothing to do with newly issued bonds. The lower yields show a market desire towards lower rates and may influence monetary policy. And that’s the catch! If the increased money supply through QE creates economic activity and inflation, the monetary policy will be interest increase and new bond coupons are based in prevailing interest rates, not yields. My question still stands, why would an initial buyer accept a lower coupon rate without the CB lowering the Bank Rate?  

Bank rate = short term interest rate
bond coupon rate = depends on maturity of bonds, and its an expectation of future inflation and credit quality

Also the biggest bond buyers out there do not buy bonds for the yield, they buy bonds as a place to park cash. Very different from retail buyer like u and me.
The biggest holders of US treasury are China and Japan. They dont buy it to earn interest....

Vatox said
In that case, why not reduce coupons to ,zero or even negative or deeply negative. I still think the CB Bank Rate has a big influence for setting new coupon rates. Help me out here because I don’t see current yields dictating new coupon rates without a CB Bank Rate change.  

How about if I say CB rate has a much bigger impact on the coupon of a new 2 year bond issue but negligible influence on a 30y new issue ? Also conventional wisdom will expect rates to be higher further out the curve.
Having said that, during rate hikes, the yield had gone inverted (negatively sloped), most noticeably in the 0-5y area. It is a result of bank rates rising faster than bond yields, as investors debate what’s the real inflation and if it’s transitional.

All the above is under normal CB operation and economy when there is no QE

Vatox said

Yes, that is awesome. Thank you. It was very disturbing earlier when you said the CB Bank Rate has absolutely NOTHING to do with coupon rates.  

Two different animals but there is some correlation. Keep in mind that CB rate is also not entirely up to CBs as some think. What happens in the real world and markets will force CB’s hand sooner or later.