/biz/ - Business & Finance

I've had enough so let me explain this shit.
1/
Government bonds are an asset where you lend the government money in order to fund government spending. The idea is that government spending is productive and improves the ability of a country to produce wealth, meaning citizens produce more/earn more, and more is returned to the government in taxes which is then used to return the initial investment to bond holders + extra.

If yield rates increase, it means that people are expecting a higher return on their initial investment for whatever reason (typically a strong, growing economy, which then leads to higher market interest rates because companies want more consumer investment to fund expansions in operation, meaning higher profits for the company and a willingness to pay more to borrow savings from individuals). Normally this wouldn't be a problem, but all the signs right now suggest that the economy isn't really recovering, meaning it would be difficult for the government to pay back bond holders from tax alone, and raising taxes is ALWAYS unpopular, so they have to create more money or borrow money to pay back bond holders.

The more yields increase, the more money the government needs to pay back its debt, so again they must borrow or print more money (look at the national debt and M2 money supply since 2008). The problem again is that without an increase in productivity, more money doesn't fix anything, it just prolongs the inevitable need for governments to stop spending money and save. Ironically, when more money is created people tend to expect the inflation of the price of goods and so will expect a higher return from bonds, else they'll sell them and suddenly no one wants to buy government debt anymore and the whole system falls apart. We're rapidly approaching this point because no one really wants to buy government bonds to fund the US government because their return is lower than inflation, meaning you lose money on your investment, and who wants that?