Question

Suppose the U.S. Treasury deems it essential to reduce short-term government security yields.

1. How could the Treasury accomplish that goal?
2. Do you think the Treasury would be successful?

Answer 1

WHEN THE TREASURY YIELD FALLS, LENDING RATES FOR CONSUMERS AND BUSINESSES ALSO FALL. IF THE DEMAND FOR TREASURIES IS LOW, THE TREASURY YIELD INCREASES TO COMPENSATE FOR THE LOWER DEMAND. WHEN DEMAND IS LOW, INVESTORS ARE ONLY WILLING TO PAY AN AMOUNT BELOW PAR VALUE

WHEN CONFIDENCE IS HIGH, THE 10-YEAR BOND'S PRICE DROPS AND YIELDS GO HIGHER BECAUSE INVESTORS FEEL THEY CAN FIND HIGHER RETURNING INVESTMENTS AND DO NOT FEEL THEY NEED TO PLAY IT SAFE. BUT WHEN CONFIDENCE IS LOW, THE PRICE GOES UP AS THERE IS MORE DEMAND FOR THIS SAFE INVESTMENT AND YIELDS FALL

SO THE TREASURY WOULD BE SUCCESSFUL