Quote:
Originally Posted by BagoPucks
Wait, honest question - why does government selling off bonds increase bond yields? Is it that they have to raise yields to keep it attractive?
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Supply and demand. If the Bank of Canada sells off a bunch of bonds the price of bonds goes down. If the price of a bond goes down the yield goes up.
Simple example: if you have a bond with face value of $100 that pays 5% interest, and then the price goes down to $90, now your current yield is 5/90= 5.55%.
That's super simplified, the yield to maturity (which is what is reported/matters) would actually be way higher because that bond pays the $100 at maturity so you have to account for that as well.
Same reason the government running huge deficits generally increases bond yields. If they sell a bunch of bonds the supply of bonds goes up which lowers the price.
**in this case the Bank of Canada is selling/redeeming old bonds that they bought during covid for quantitative easing, when they were trying to lower rates/juice the economy.