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Effect of QE on bond yields

Can anyone tell me why quantitative easing causes bond yields to fall? I couldn't figure it out in lesson, and I've been challenged now...
Reply 1
Avatar for Nirgilis
Nirgilis
14
Could you tell me what you don't understand about it? :tongue:
Reply 2
Avatar for samthemiller
samthemiller
OP
10
Original post by Nirgilis
Could you tell me what you don't understand about it? :tongue:



Literally, why does quantitative easing cause bond yields to fall? I understand exactly why it causes the price to increase, but surely that would mean existing holders would be better off? (as they'd get more return on the investment)
Reply 3
Avatar for Nirgilis
Nirgilis
14
Original post by samthemiller
Literally, why does quantitative easing cause bond yields to fall? I understand exactly why it causes the price to increase, but surely that would mean existing holders would be better off? (as they'd get more return on the investment)


Haha! I have no idea - I'm a Chemist! :tongue: . I was only bumping your thread so you could get some more views and (hopefully) some help. Normally writing out what you know helps you understand it :h: . Have you tried looking at some explanations on google to see if a different viewpoint exists (and one you might prefer? :tongue: )
Reply 4
Avatar for Old_Simon
Old_Simon
12
If the bond price rises then obviously the yield falls. That is basic terminology.
Original post by samthemiller
Can anyone tell me why quantitative easing causes bond yields to fall? I couldn't figure it out in lesson, and I've been challenged now...


Think about it. What is quantative easing? How is it done?
Reply 6
Avatar for samthemiller
samthemiller
OP
10
Original post by Nirgilis
Haha! I have no idea - I'm a Chemist! :tongue: . I was only bumping your thread so you could get some more views and (hopefully) some help. Normally writing out what you know helps you understand it :h: . Have you tried looking at some explanations on google to see if a different viewpoint exists (and one you might prefer? :tongue: )


na every site seems to glaze over it, I was hoping some economics genius around here'd be able explain it. my econ teacher'd be well impressed

thanks for the bump though!!! :smile:
Reply 7
Avatar for samthemiller
samthemiller
OP
10
Original post by Old_Simon
If the bond price rises then obviously the yield falls. That is basic terminology.


But WHY
Reply 8
Avatar for Old_Simon
Old_Simon
12
Original post by samthemiller
But WHY

Well it has nothing to do with QE it is basic bond behaviour. Consider a bond paying 8% trading at par of £100. Now the bond price changes to let us say £160. But you still get £8 interest pa. ie 5%. That is the new yield.
Reply 9
Avatar for samthemiller
samthemiller
OP
10
Original post by Old_Simon
Well it has nothing to do with QE it is basic bond behaviour. Consider a bond paying 8% trading at par of £100. Now the bond price changes to let us say £160. But you still get £8 interest pa. ie 5%. That is the new yield.


I think I need to go away and research bonds
So my sister's boyfriend (with degree in economics) says that it's because there's such a high demand for bonds from the central bank during QE that the government can lower interest rates on the bond as they don't need to attract investors. Any comments?

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