Does the gov just sell as many bonds as people bring money to purchase, meaning it can never be sold out?
I always thought they set some target/range/limit, but if that's true, they don't really control the yield
The thought goes something like this:
Say newly issued treasury has 4.5% coupon, then that is used to price an older bond that has say a 2% coupon, making it trade at a discount using 4.5% as the discount rate. Not sure if correct, but that's how I make sense of it.
But to an investor pricing a 2% coupon bond, they won't necessarily use that 4.5% as the discount rate, it just depends on what alternative risk-free return they can actually obtain. If bonds are unlimited, then yes use 4.5%, but that contradicts with my understanding that there's a limit to bond issuance. If bonds are limited, then it's the market that determines what a 4.5% coupon bond should be priced.
To put the question to an extreme example, suppose the gov issues only 1 x $1000 20-year bond, with a coupon of 30%. Would investors just start using 20% discount rate for all bonds all of a sudden?
Submitted October 19, 2022 at 11:39PM by tmjunkuse https://ift.tt/U2KEpV8
