I have a question on the effect of government auction on bonds?

Discussion in 'Economics' started by new0214, May 11, 2009.

  1. new0214


    Q1 - If there is a government auction – more bonds are sold to the system and money is taken out from the system and given to the govrnmentt. So a govt auction leads to lower Liquidity and this is bad for the bond markets. Is this correct ?

    Q2 – If there is no government auction coming then there is more liquidity. This will help bonds more at the shorter end than the longer end. What does this mean ?

    Q3 - Large borrowing program by the government is bad for the bond market. But more for the longer end. What does this mean ?
  2. 1. Strictly speaking, yes... Govt selling bonds implies that the mkt ends up with less cash and more bonds (collateral). However, that doesn't imply lower liquidity. In fact, it's the opposite, if anything, as auction provides a very viable price discovery mechanism.

    2. This is not an obvious effect, but, in general, govt supply affects the longer maturity bonds more (lowers their prices), because prices for shorter maturity bonds are normally driven by other factors (simplistically speaking, money mkt interest rates, as well as rate expectations).

    3. See point 2.