Government bonds: The great bond conundrum

Huge supply, uncertainty over the inflation outlook and the effects of exceptional monetary policy, the prospect of a dramatic rise in yields, or a buyers’ strike: all these are stalking government bonds. Alex Chambers finds out whether the bond market will blow stuttering economic activity off track.

A KEY TENET of economic theory is that if the supply of a good doubles, then the price buyers are willing to pay is likely to decline dramatically – all things being equal. In the case of government bond markets, huge additional supply will lead invariably to higher yields – at least hypothetically. And yet two years into the crisis, and back in the real world, yields are lower because not all things remained equal.

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