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What Drives Government Bond Yields?

Summary:
For us the five major drivers of government bond yields are: Inflation expectations and inflation: The by far most important criterion. High inflation expectations must be compensated via higher bond yields. The main driver behind inflation expectations is the wage development, this is the form of inflation that typically persists. Price inflation follows inflation expectations with a certain lag. Wealth: The higher the wealth of a country, the lower the bond yields. Wealth is typically increased by high savings. Regular and irregular influences on bond yields by central banks: Regular: Central banks buy government bonds, in particular in US Dollars, the world reserve currency. Irregular: Central banks buy bonds of their own government and depress yields - the "quantitative easing". If a country has relatively low wealth then foreigners must help with the purchase of bonds and the following factors become relevant: Foreign debt relative to GDP: Foreign bond holders want higher yields against risks (e.g. currency risks) of holding foreign assets. The net international investment position (5a) and change in this position, namely the current account balance (5b).

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4375_Wittmann_WalterFor us the five major drivers of government bond yields are: Inflation expectations and inflation: The by far most important criterion. High inflation expectations must be compensated via higher bond yields. The main driver behind inflation expectations is the wage development, this is the form of inflation that typically persists. Price inflation follows inflation expectations with a certain lag. Wealth: The higher the wealth of a country, the lower the bond yields. Wealth is typically increased by high savings. Regular and irregular influences on bond yields by central banks: Regular: Central banks buy government bonds, in particular in US Dollars, the world reserve currency. Irregular: Central banks buy bonds of their own government and depress yields - the "quantitative easing". If a country has relatively low wealth then foreigners must help with the purchase of bonds and the following factors become relevant: Foreign debt relative to GDP: Foreign bond holders want higher yields against risks (e.g. currency risks) of holding foreign assets. The net international investment position (5a) and change in this position, namely the current account balance (5b).
George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.

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