What happens to exisitng treasury bond prices when the government decides to issue new treasury bonds?
April 12, 2009 by How Savings Bonds Work
Filed under More Bonds Answers
Can you answer Jeff D’s question about Bonds?:
What happens to exisitng bond prices when the government decides to issue new treasury bonds?
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What happens to exisitng bond prices when the government decides to issue new treasury bonds?
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Bonds Feedback: The interest rates do not change after a bond is issued. If you intend to sell a bond before it matures the selling price can change if the interest rate on new bonds is higher or lower than the old bonds. As an example if the new bonds interest rate is lower the value of the old bonds will go up.
OK, Jeff D, basically the prices of previously existing bonds will fall if and when the government issues and sell more treasury bonds. When the government issues bonds, banks are obligated to buy those bonds and this action decreases liquidity in the market resulting in lower supply and, therefore, higher prices or interest rates. HIgher interest rates mean lower bond prices. Witness the recent purchase of bonds by the fed which injected liquidity into the market meaning a greater supply of money available for loans resulting in lower interest rates and higher bond prices - the opposite case scenario of your question.