They auction some debt in the market and it is backed and supported by full faith of the country. How does this works?.
The gov auctioned bonds are the safest with less returns. So the gov will auction the bonds and lend the money to local/community banks.
Bond comes with yield and price. These two are very confusing. Let me explain in easy way.
Now US Fed sells the bonds and buys the bonds to keep the mortgage interest rates at low. In US mortgage loans are given as 30 yrs and 15 yrs and they are tied to 30 yrs and 15 yrs bonds.
Lets Understand YIELD little bit more. In cultivation we say crop yield that is expectation of the crop.. At the end of crop duration we will get so many quintals of yield. So in bond also they expect the same after the specified time the returns.
Bond Price the bidding price for the given yield. i.e After the crop seeded there was pest attack/ some germination issues then the farmer need to spend more in order to meet the specified quintals of yield. So that’s operational cost is called Bond Price.
When the price of the 30 yrs bonds gets more demand its price will go up. When any bond price goes up, its YIELD will go down. How does stock market/ Fed understands this move?
When the Bond prices are going up lot of people are investing in safe heavens at lesser return. So people understand that stock market are volatile and economy is not good. So they decided to invest in bonds which are stable returns.
In reverse When the Bond price goes down the yield return will be more. So people are coming out of bond market by thinking that stock market is attractive. So people think economy is reviving.
So this is the way how we get the money in to the system. What happened to US is in addition to these above ways Foreign institutional investors thought that US property is safe investment and invested in buying the Private backed securities which are bundled of all the different types of loans bundled and the investors are given guaranteed return on this. Govt thought that it’s a good move because the construction has increased and lot of new jobs are being created. Financials are getting good returns and every body are happy.
In the whole relaxation of Home loan under writing process started ,brokers and lenders started over looking them. Then every body thought of buying home. When homes are buying and buying it spurs real estate market and speculation gets added to that. The speculations has crossed the buyer/borrower eligibility and people didn't realized and govt also didn't put any breaks on that. The over priced and over ambitious people started facing the in ability to pay the loans repayment. Then it went for foreclosure and becoz of the foreclosure the price of the house surrounding also come down. Then when its neighbors understood that their home value are falling down and its less than the amount they owe to lender, especially from recent buyers . So they started coming out of the contract and house went for foreclosure.
But after all the experience if any body is making huge profits year on year there will be some thing wrong. That’s where the govt / regulators need to get in to that, inspect and make sure there are no systemic risks(its tentacles are not spread across. So that its failure will not affect the whole list of others). As every body understood money moves from one person to other in regular situations. But if its movement is too much then we are neglecting one class people and we need to bring them other wise there will be wreckage.
The gov auctioned bonds are the safest with less returns. So the gov will auction the bonds and lend the money to local/community banks.
Bond comes with yield and price. These two are very confusing. Let me explain in easy way.
Now US Fed sells the bonds and buys the bonds to keep the mortgage interest rates at low. In US mortgage loans are given as 30 yrs and 15 yrs and they are tied to 30 yrs and 15 yrs bonds.
Lets Understand YIELD little bit more. In cultivation we say crop yield that is expectation of the crop.. At the end of crop duration we will get so many quintals of yield. So in bond also they expect the same after the specified time the returns.
Bond Price the bidding price for the given yield. i.e After the crop seeded there was pest attack/ some germination issues then the farmer need to spend more in order to meet the specified quintals of yield. So that’s operational cost is called Bond Price.
When the price of the 30 yrs bonds gets more demand its price will go up. When any bond price goes up, its YIELD will go down. How does stock market/ Fed understands this move?
When the Bond prices are going up lot of people are investing in safe heavens at lesser return. So people understand that stock market are volatile and economy is not good. So they decided to invest in bonds which are stable returns.
In reverse When the Bond price goes down the yield return will be more. So people are coming out of bond market by thinking that stock market is attractive. So people think economy is reviving.
So this is the way how we get the money in to the system. What happened to US is in addition to these above ways Foreign institutional investors thought that US property is safe investment and invested in buying the Private backed securities which are bundled of all the different types of loans bundled and the investors are given guaranteed return on this. Govt thought that it’s a good move because the construction has increased and lot of new jobs are being created. Financials are getting good returns and every body are happy.
In the whole relaxation of Home loan under writing process started ,brokers and lenders started over looking them. Then every body thought of buying home. When homes are buying and buying it spurs real estate market and speculation gets added to that. The speculations has crossed the buyer/borrower eligibility and people didn't realized and govt also didn't put any breaks on that. The over priced and over ambitious people started facing the in ability to pay the loans repayment. Then it went for foreclosure and becoz of the foreclosure the price of the house surrounding also come down. Then when its neighbors understood that their home value are falling down and its less than the amount they owe to lender, especially from recent buyers . So they started coming out of the contract and house went for foreclosure.
But after all the experience if any body is making huge profits year on year there will be some thing wrong. That’s where the govt / regulators need to get in to that, inspect and make sure there are no systemic risks(its tentacles are not spread across. So that its failure will not affect the whole list of others). As every body understood money moves from one person to other in regular situations. But if its movement is too much then we are neglecting one class people and we need to bring them other wise there will be wreckage.