Economic gurus: a question...

"Republicans have the bond flying
and the intrest rates at the lowest point since WWII"

This is not my quote. Am I wrong in thinking this is a contradictory statement? How can the bond simultaneously "fly" with low interest rates? Please educate me.

Interest rates fall as bond prices rise.

If a bond is yielding (x)% at the current price and the price rises, the interest rate necessarily goes down.

Bond price = $100.00
Interest Paid = $5.00
Bond Yield = 5%

Bond Price = $110.00
Interest Paid = still $5.00
Bond Yield = 4.5%

O

The market is strong in anticipation of a raise in interest rates, so bargain hunters are flooding capital into that market. There's overliquidity in the stock market so the profit takers have to move cash into other areas.

Many believe Greenspan is their ally and will raise rates to ward off hyperliquidity of banks and other financial instruments. (Hyperliquidity is thought to lead to inflation, due to the effective hoarding of cash and equivalents.) So, the bond market is "flying". The bonds themselves are still very low yield. Folks are speculating on the fact that they will go up and are pledging liquidity to take advantage.

Besides which, the duplicity in this statement is that interest rates are the only integral part of the macroeconomy that is truly contolled by supply & demand, so the government has practically nothing to do with it. So, they're taking credit for the one thing the "free market" almost completely controls, while claiming to believe in the miracle of the free market.

The two have little to do with one another, and are not good indicators of economic vibrancy.
The Professor

The number of "users" buying - not to the returns themselves?

As others noted, when you are buying a bond, you are buying a stream of income -- say, $500 on a bond. If you can buy the income stream cheap, the money you spend to get it gets a high return -- and that is true whenever you buy something cheap. But with bonds, as with other things, the more you have to pay for the same item the less you are getting for your money -- the less the returns.

If rates go down, bond prices must go up because they are paying higher rates than the new ones being issued. Then, the effective rate is about the same.

That quote leaves out something: the reason why rates are so low, which is because the economy is stagnate.

to note the obvious - if it might hurt the GOP or Bush

low interest rates mean the economy is not doing so well and considering that just today Greenspan did not raise rates means that there is no sustainable recovery in sight. That's not good

most bond buyers are not interested in getting interest, just like most stock buyers are not interested in dividends. The bond "market" isn't you and me, but huge investment and pension funds.

The big bond traders and funds make their money by trading. Let's say you bought a $100 bond discounted to $95 and interest rates go down. You can sell the bond to someone else for $96 and the new owner will then get the new interest rate and you get a profit on the sale of the bond. If rates go up, you may sell it for $94 and lose money on the deal.

Why would someone pay you more for the bond than you paid for it? They are betting that rates will still go down and they will profit on the next trade.

Why would you sell a bond for less than you paid for it? You are getting less of a return on your money when rates go up. You take the loss and put what money you have in a (hopefully) better investment.

It's pretty much like stock, gold, currency, etc. trading. You just try to get as much out of each deal as you can, and not worry too much about what it is that you're actually trading.

In addition such trading can be done with monstrous leverage. So a small movement in price can yield impressive profits. You can see how raw speculation of interest rate movements can be a very important factor in moving the price of bonds.

O

and in the derivatives markets, you're playing with almost none of your own money.

Actually, the big guys rarely play with their own money anyway. It's our money they play with, and they keep the spread while we take the losses.

The local bookie does the same thing, but at least he's straight up about it and doesn't run for office.

http://www.bankrate.com/brm/news/fed/fedwatch.asp is a small part of a website that has helped me many times with my questions about the best savings rates available, the intricacies of mortgages, and understanding the economic news.