Tuesday, May 20, 2014

No Supply-Demand laws for the Public Debt markets?

There is some concern about the anticipated QE from the ECB, with respect to the public debt yields (e.g. Reuters article). In other words, there is some widespread (?) concern that Eurozone bond yields will rise due to higher inflation expectations following the highly awaited intervention of the ECB. Expectations matter, but what about the Supply & Demand Laws?

If we take under consideration the vast shift in the demand for bonds, their price will move upwards and, hence, their yields will fall.

This is what happened in the US following each QE.





So, inflation has been firmly tamed and both long-term and short-term Government debt yiels have decreased. 

Is there any case with monetary expansion accompanied with increases in Government's cost of borrowing while GDP being way off course?