Wednesday, May 28, 2008


I keep reading in various obscure places stories about the bond market being "flooded" with new government bonds. It seems that U.S. government debt is not slowing down at all.

Why does this matter?

Over the past 8 years or so, there has been a whole lot of cash sloshing around in the world that gladly bought U.S. debt. But what happens if that stops? It's simple supply and demand. If you have too much debt/too many bonds and not enough buyers, bond "prices" go down until someone will buy them.

Why do you care?

Because when bond prices fall to encourage people to buy them, yields (read: interest rates) go up inversely. No matter what the Fed does. And recently that has been happening. So far the increase has been slight, not enough to get the media's attention. But if it keeps up, it may be the beginning of inflation fears showing up as significantly higher interest rates.

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