<blockquote>
<p>Why would a decline from 5.24 per cent to 3.53 per cent be considered a positive reward on the part of the bond market?</p>
</blockquote>
<p>Because it means government can raise more money from bond market. Bonds are fixed income securities, coupon payments are some fixed unchanging number. When bond yields get lower that is because their price increases. That means more money for government, since either new bonds can be issued with lower coupon or with the same coupon but government gets premium.</p>
<blockquote>
<p>As far as I know, the coupon rate on a bond is directly proportional to the defaulting risk from the borrower, so I cannot understand why this course of action would be considered as a positive reward on the part of the bond market.</p>
</blockquote>
<p>Coupon rate can be freely chosen by issuer and does not necessarily need to correspond to risk. What happens is that if traders think bonds are more/less risky they will buy them at discount/premium, and that is how the change in risk is reflected.</p>
<p>Issuers will typically try to set coupon rate so it more or less reflects interest rates, but this can be rarely done precisely.</p>
<p>However, it’s important to note people respond to expected (perceived) level of risk. True level of risk is unknown ex ante.</p>

CC BY-SA 4.0
2024-12-20T01:19:46.110Z
Thank you very much! I suppose that the lowered yield bond's price increase is due to a higher repayment certainty and if a bond's coupon rate is increased and its price diminished, it is because the risk of default has increased, am I right?
Enrique
CC BY-SA 4.0
2024-12-20T14:26:52.067Z
@Enrique it’s because the *precieved* risk changes. People don’t know the real % probability of US default. Also if you think this answer answers your question consider accepting it
1muflon1
CC BY-SA 4.0
2024-12-20T00:37:07.867Z
2024-12-20T00:46:47.883Z
2024-12-20T00:46:47.883Z
1muflon1
<p>I came across the next lines:</p>
<p>That does not mean, however, that the bond market rules the world in the sense that James Carville meant. Indeed, the kind of discipline he associated with the bond market in the 1990s has been conspicuous by its absence under President Clinton’s successor, George W. Bush. Just months before President Bush’s election, on 7 September 2000, the National Debt Clock in New York’s Times Square was shut down. On that day it read as follows: ‘Our national debt: \$5,676,989,904,887. Your family share: \$73,733.’ After three years of budget surpluses, both candidates for the presidency were talking as if paying off the national debt was a viable project. According to CNN</p>
<p><em>Democratic presidential nominee Al Gore has outlined a plan that he says would eliminate the debt by 2012. Senior economic advisers to Texas Governor and Republican presidential candidate George W. Bush agree with the principle of paying down the debt but have not committed to a specific date for eliminating it.</em></p>
<p>That lack of commitment on the latter candidate’s part was by way of being a hint. During Bush’s time in the White House, his administration ran a budget deficit in seven out of eight years. The federal debt increased from \$5 trillion to more than \$9 trillion. In 2008 the Congressional Budget Office forecast a continued rise to more than \$12 trillion by 2017. Yet, far from punishing this profligacy, the bond market positively rewarded it. Between December 2000 and November 2008, the yield on ten-year Treasury bonds declined from 5.24 per cent to 3.53 per cent.</p>
<p>Ferguson, Niall. The Ascent of Money: A Financial History of the World: 10th Anniversary Edition (English Edition) (p. 109). Penguin Publishing Group. Edición de Kindle.</p>
<p>As far as I know, the coupon rate on a bond is directly proportional to the defaulting risk from the borrower, so I cannot understand why this course of action would be considered as a positive reward on the part of the bond market.</p>

CC BY-SA 4.0
2024-12-19T20:12:50.107Z
On this site we use MathJax please use `\$` instead of `$` otherwise the site thinks that you are trying to enter an equation
1muflon1
CC BY-SA 4.0
2024-12-19T20:17:34.547Z
Also, the lines that you quote don’t mention that % decline, could you make the question self contained by including that passage?
1muflon1
<bonds><debt><financial-markets>
Why would a decline from 5.24 per cent to 3.53 per cent be considered a positive reward on the part of the bond market?
Enrique
# Why would a decline from 5.24 per cent to 3.53 per cent be considered a positive reward on the part of the bond market?

(Asked by: username_0 on 2024-12-19)

I came across the next lines:

That does not mean, however, that the bond market rules the world in the sense that James Carville meant. Indeed, the kind of discipline he associated with the bond market in the 1990s has been conspicuous by its absence under President Clinton’s successor, George W. Bush. Just months before President Bush’s election, on 7 September 2000, the National Debt Clock in New York’s Times Square was shut down. On that day it read as follows: ‘Our national debt: \$5,676,989,904,887. Your family share: \$73,733.’ After three years of budget surpluses, both candidates for the presidency were talking as if paying off the national debt was a viable project. According to CNN

*Democratic presidential nominee Al Gore has outlined a plan that he says would eliminate the debt by 2012. Senior economic advisers to Texas Governor and Republican presidential candidate George W. Bush agree with the principle of paying down the debt but have not committed to a specific date for eliminating it.*

That lack of commitment on the latter candidate’s part was by way of being a hint. During Bush’s time in the White House, his administration ran a budget deficit in seven out of eight years. The federal debt increased from \$5 trillion to more than \$9 trillion. In 2008 the Congressional Budget Office forecast a continued rise to more than \$12 trillion by 2017. Yet, far from punishing this profligacy, the bond market positively rewarded it. Between December 2000 and November 2008, the yield on ten-year Treasury bonds declined from 5.24 per cent to 3.53 per cent.

Ferguson, Niall. The Ascent of Money: A Financial History of the World: 10th Anniversary Edition (English Edition) (p. 109). Penguin Publishing Group. Edición de Kindle.

As far as I know, the coupon rate on a bond is directly proportional to the defaulting risk from the borrower, so I cannot understand why this course of action would be considered as a positive reward on the part of the bond market.

**Tags:** bonds, debt, financial-markets
> **Comments:**
> **username_1**: On this site we use MathJax please use `\$` instead of `$` otherwise the site thinks that you are trying to enter an equation  
> **username_1**: Also, the lines that you quote don’t mention that % decline, could you make the question self contained by including that passage?  

---

## 1 answers

### Answer by username_1 on 2024-12-20. Score: 1 | Accepted answer

> Why would a decline from 5.24 per cent to 3.53 per cent be considered a positive reward on the part of the bond market?

Because it means government can raise more money from bond market. Bonds are fixed income securities, coupon payments are some fixed unchanging number. When bond yields get lower that is because their price increases. That means more money for government, since either new bonds can be issued with lower coupon or with the same coupon but government gets premium.

> As far as I know, the coupon rate on a bond is directly proportional to the defaulting risk from the borrower, so I cannot understand why this course of action would be considered as a positive reward on the part of the bond market.

Coupon rate can be freely chosen by issuer and does not necessarily need to correspond to risk. What happens is that if traders think bonds are more/less risky they will buy them at discount/premium, and that is how the change in risk is reflected.

Issuers will typically try to set coupon rate so it more or less reflects interest rates, but this can be rarely done precisely.

However, it’s important to note people respond to expected (perceived) level of risk. True level of risk is unknown ex ante.

> **Comments:**
> **username_0**: Thank you very much! I suppose that the lowered yield bond's price increase is due to a higher repayment certainty and if a bond's coupon rate is increased and its price diminished, it is because the risk of default has increased, am I right?  
> **username_1**: @Enrique it’s because the *precieved* risk changes. People don’t know the real % probability of US default. Also if you think this answer answers your question consider accepting it  

---

