Stop Buying US Treasury Bonds

Page 3: Introduction to the Financial System Page 7: Commercial Banks Page 12: The Share Market and the Corporation Page 15: Corporations Issuing Equity into the Share Market Page 19: Investors in the Share Market Page 24: Short-term Debt Page 28: Medium- to Long-term Debt Page 32: Interest Rate Determination and Forecasting Page 37: The Foreign Exchange Market Page 40: Factors that Influence the Exchange Rate Page 42: Futures Contracts and Forward Rate Agreements Page 47: Options

This is where the quantity demanded and the quantity supplied are equal. The corresponding price is the equilibrium price and the quantity is the equilibrium quantity.

2. Jordan, Bradford D., Susan D. Jordan, and David R. Kuipers. "The Mispricing of    Callable U.S. Treasury Bonds: A Closer Look." Journal of Futures Markets 18.1 (1998): 35-51. Web.

China has taken advantage of this situation tremendously. Using U.S. Treasury holdings as leverage, the Chinese economy has seen an increase of 10% growth in its economy that was already on an upward swell. As the research suggests "Owning U.S. Treasury notes helps China's economy grow by keeping its currency weaker than the dollar. This keeps products exported

Business conditions determine the demand for bonds, if favourable there is an increase that shift the demand curve to the right), pushing prices higher and yields lower however if business conditions were unfavourable, profit opportunities for businesses dried up, shifting the supply curve of bonds left, further increasing bond prices and depressing yields. During inflationary periods, interest rates rose per the Fisher Equation and Keynes's real nominal balances.The birth of globalization and end of the cold was helped in the reduction of interest rates by rendering the business climate favourable therefore pushing the demand curve for bonds to the right, bond prices upward, and yields

The weak economic growth in Asia ad in Europe has helped in benefiting Canada and the US. Asia and Europe had also faced deflationary pressures which were caused by the changes in the rates of interest rates in the economy. The risk of the inflationary pressure in the US led to the increasing concern of the federal reserves. The Canadian bonds have been trading at a considerably lower yield as compared to the US bonds in the market. The situation was supposed to be maintained if the Canadian dollars in the economy appreciated relatively to those of the US dollars in the economy. The outlook for the bonds in the economy looked to be very attractive an aspect which was attributed to the changes in

Supply and demand lies in the heart and soul of economics. The concept is perhaps the single most driving force in an economy, specifically a capitalist economy. Supply and demand is based on two concepts: The law of demand and the law of supply. The law of demand states that the demand of a product rises as its price falls, therefore the demand of a product falls as its price rises. A good example of this occurs in grocery stores. If the price of a case of Coca-cola drops from $6.99 to $2.99 the demand for the product will rise because more people are willing to pay $2.99 rather than $6.99. Not only will typical consumer of Coca-cola purchase more but consumers who are not normally willing to pay $6.99 will make the purchase. Substitution also plays a role in the equation. Substitution occurs when consumers substitute one good for another based on price levels. In the Coca-cola scenario, some Pepsi drinkers will purchase the Coca-cola given the case of Pepsi is price higher.

If we consider this supply and demand diagram prior to Government intervention (red line), the market leads to equilibrium price and quantity (P1, Q1) determined at the intersection of the supply (or MPC) and demand curve. Due to the

To stabilize the economy bonds are used which release money into the market. The responsibility of the Central Bank is to maintain the health of the banking system and regulating the purchase and sale of bonds. The interest rates are controlled to balance the markets. According to the Monetary Policy Report to Congress, “The Federal Open Market Committee (FOMC) maintained a target range of 0 to ¼ percent for the federal funds rate throughout the second half of 2009 and early 2010” while representing forecasted economic decisions to rationalize low levels for longer times on the federal funds rate (Federal Reserve, 2010). Purchases were still being made by the Fed’s to result in improvements to the economy through focusing on mortgages, the real estate market, and the credit market. Predictions by the Federal Open Market Committee depicted low levels on the federal funds rates in early 2010 which would continue for some time while over time the economy would see growth, a rise in inflation, and a decline in unemployment. Feds were in agreement though they expected the recovery process to be slower. Purchases by the Federal reserve were slowed, “$300 billion of Treasury securities were completed by October” and “the purchases of $1.25 trillion of MBS and about $175 billion of agency debt” were suppose to be finished the first quarter of 2010 (Federal Reserve, 2010).

The financial crisis of 2008 has been described as the worst financial crisis the world has seen since the great depression, but there are now murmurings of the potential for an even greater financial crisis, a currency crisis, caused by the demise of the US Dollar. The Dollar has been the reserve currency of the world since it took over from the Pound at the end of world war two, but we examine if it is about to crash spectacularly?

since 2000 (Edwards, S., 2005).” As a result of the increase in foreign demand for U.S. assets, Americans have had access to foreign investment enabling the United States to function with large deficits for years. Looking forward, the United States dollar and the economic health of the country is very dependent on foreign investment in U.S. assets. A potential risk looms in the chance that Asian central banks might lower their demand in U.S. assets resulting in a sharp decline in the U.S.

22) The above figure shows a graph of the market for pizzas in a large town. At a price of $14, there will be A) no pizzas supplied. B) equilibrium. C) excess supply. D) excess demand. Answer: C 23) The above figure shows a graph of the market for pizzas in a large town. At a price of $5, there will be A) excess demand. B) excess supply. C) equilibrium. D) zero demand. Answer: A 24) The above figure shows a graph of the market for pizzas in a large town. What are the equilibrium price and quantity? A) p = 8, Q = 60

Meanwhile, bond yields have increased in anticipation of a rise in inflation. Much will depend on the Fed’s ability to cap any subsequent rise in inflationary expectations to prevent a nasty upside overshoot in yields. The speed of any increase in bond yields will also depend on how any easing of US fiscal policy is financed. In the 1980s, under President Reagan, the US began running large current account deficits that subsequently became chronic. The source of the external deficit was a sizeable federal government budget deficit, courtesy of large increases in defence spending and aggressive tax cuts. Meanwhile, the US domestic private sector was running insufficient financial surpluses to meet increased federal government borrowing. Thus, this outcome consequently meant that foreigners were the major source of funding of the US federal government’s budget deficit during the 1980s. Given the US government borrowed in dollars, foreign lenders began demanding an exchange rate premium on Treasury bond yields, particularly after the Plaza Accord in September 1985. It was the willingness of foreigners to fund US fiscal expansion before the Plaza Accord that enabled the US economy to recover very strongly in the aftermath of the deep 1981-2 recession. The current environment is, however, very different to the 1980s, given the proximity of

Many government related institutions issue bonds, some supported by the revenues of a specific institution and some guaranteed by a government sponsor. For example, in Canada they have a bank that issue bonds that are guaranteed by the

The rising bond yields is expected to worsen the debt of the country. This is due to the trading bonds between the speculators. The speculators purchase large amount of government bonds to create shortage to the market. This forces the government to rise yields and create a more worsen situation to the country. A lower interest rate is required for the non-tradable debt instruments compare to bond market yields during crisis. Since the non-tradable debt instruments are cannot be traded, there is no market. This means that there is no speculation in the market.