<p>Federal Reserve System is likely to raise interest rates because of inflation thus making money market rates (market where different banks and non-bank institutions lend each other money) higher. Higher interest rates in money market make financial institutions to sell bonds and allocate their money to money market or deposits in FRS.</p>
<p>When bonds are sold their price falls making coupon payments and maturity payment more attractive and raising yields because they are calculated as PV / price of bond.</p>

CC BY-SA 4.0
2022-08-07T19:52:16.457Z
So it seems that everything I wrote is valid, except that the current inflation environment is the one element that changes things?
StatsScared
CC BY-SA 4.0
2022-08-07T20:03:09.680Z
Yes, knowadays yields of financial assets in US are closely related to expected path of federal reserve interes rate. Normaly in recession fed was going to cut rates, but in 2022 high inflation is more hard problem that temporary stagnation of GDP.
Maksim Tarasenko
CC BY-SA 4.0
2022-08-08T10:31:38.827Z
How banks react to higher policy rates is not very clear and is only part of the story. For example, you say that banks reallocate from bonds to the money market (holding more cash) or deposit in FRS (holding less cash). Holding more cash seems counterintuitive when rates are rising.
BrsG
CC BY-SA 4.0
2022-08-08T22:11:18.897Z
This is not a storyabout more or less cash because banks can sell bonds otc (not in the exchange). When one bank that held bond sell it to another bank price of stock drops, but these two banks still have same amount of cash. 
Secondly, banks reallocated to money market do not hold more cash, because they need cash in order to lend it and get liability of other institution that has yield that is slightly higher that lower edge of frs interest band. Thirdly, if there is no demand for cash in money market bank can go to deposit in frs that has frs interest rate return.
Maksim Tarasenko
CC BY-SA 4.0
2022-08-08T22:14:10.527Z
Both interest rates in money market and interest for deposits in frs are connected to frs policy rate. These two interest rates after the positive shock of policy rate are higher than bond yield. This makes banks to sell bonds and go to money market or deposits in federal reserve.
Maksim Tarasenko
CC BY-SA 4.0
2022-10-17T22:55:39.770Z
Hi @Maksim Tarasenko. Coming back to this. My post mentioned that "when investors’ confidence level is low, the demand for Treasuries will increase" which in turn leads to lower yields. You then mention the FED rising interest rates and that leading to higher yields. What should I make of this, given that both statements are true?
StatsScared
CC BY-SA 4.0
2022-08-07T19:40:38.027Z
2022-08-07T19:40:38.027Z
Maksim Tarasenko
<p>I understand that when investors’ confidence level is low, the demand for Treasuries will increase, hiking up Treasuries’ prices and lowering their yields. As a result, declining Treasury yields are typically viewed as indicating a potential economic slowdown. Right now, as of Aug 2022, GDP figures are indicating that the US may already be in a recession (according to some definitions).</p>
<p>So why aren’t US Treasury yields going down, since, in principle, investors should be buying more US Treasuries, not less.</p>
<p>For reference, see the chart: cnbc.com/quotes/US10Y</p>

<macroeconomics><bonds><treasuries>
Why are U.S. treasury yields currently rising when the U.S. economy has likely entered a recession?
StatsScared
# Why are U.S. treasury yields currently rising when the U.S. economy has likely entered a recession?

(Asked by: username_0 on 2022-08-07)

I understand that when investors’ confidence level is low, the demand for Treasuries will increase, hiking up Treasuries’ prices and lowering their yields. As a result, declining Treasury yields are typically viewed as indicating a potential economic slowdown. Right now, as of Aug 2022, GDP figures are indicating that the US may already be in a recession (according to some definitions).

So why aren’t US Treasury yields going down, since, in principle, investors should be buying more US Treasuries, not less.

For reference, see the chart: cnbc.com/quotes/US10Y

**Tags:** macroeconomics, bonds, treasuries


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## 1 answers

### Answer by username_1 on 2022-08-07. Score: 1

Federal Reserve System is likely to raise interest rates because of inflation thus making money market rates (market where different banks and non-bank institutions lend each other money) higher. Higher interest rates in money market make financial institutions to sell bonds and allocate their money to money market or deposits in FRS.

When bonds are sold their price falls making coupon payments and maturity payment more attractive and raising yields because they are calculated as PV / price of bond.

> **Comments:**
> **username_0**: So it seems that everything I wrote is valid, except that the current inflation environment is the one element that changes things?  
> **username_1**: Yes, knowadays yields of financial assets in US are closely related to expected path of federal reserve interes rate. Normaly in recession fed was going to cut rates, but in 2022 high inflation is more hard problem that temporary stagnation of GDP.  
> **username_2**: How banks react to higher policy rates is not very clear and is only part of the story. For example, you say that banks reallocate from bonds to the money market (holding more cash) or deposit in FRS (holding less cash). Holding more cash seems counterintuitive when rates are rising.  
> **username_1**: This is not a storyabout more or less cash because banks can sell bonds otc (not in the exchange). When one bank that held bond sell it to another bank price of stock drops, but these two banks still have same amount of cash.  Secondly, banks reallocated to money market do not hold more cash, because they need cash in order to lend it and get liability of other institution that has yield that is slightly higher that lower edge of frs interest band. Thirdly, if there is no demand for cash in money market bank can go to deposit in frs that has frs interest rate return.  
> **username_1**: Both interest rates in money market and interest for deposits in frs are connected to frs policy rate. These two interest rates after the positive shock of policy rate are higher than bond yield. This makes banks to sell bonds and go to money market or deposits in federal reserve.  
> **username_0**: Hi @username_1. Coming back to this. My post mentioned that "when investors’ confidence level is low, the demand for Treasuries will increase" which in turn leads to lower yields. You then mention the FED rising interest rates and that leading to higher yields. What should I make of this, given that both statements are true?  

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