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Pastimes : Ask Mohan about the Market
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To: Bonnie Bear who wrote (8562)11/19/1997 12:00:00 PM
From: Joss  Read Replies (1) of 18056
 
Hi Bonnie,

<<The only people who make large capital gains from bonds hold them while interest rates are being cut by large percentages.>>

That is exactly the point. If the yeild rises due to Japaneese selling, and we are still in a deflationary environment (I suspect that the spike up in rates would increase this), then the yeild would be artifically high. Thus, buyers would come in, bond prices would rise (dropping yeilds) and one could sell the treasuries at the rising prices making capital gains. I say rising prices because I never know where the top is.<grin>

The confusion here may be "what causes long term interest rates to rise and fall". It is done by the market, not the Fed. The Fed only has control over short term rates. We have been in periods where the Fed attempted (through short term rates) to change the long term rates and was unsuccessful.

Steve
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