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in the context of low yields, where fed continues with fiscal stimulus, I've heard from many economists that this week the 10Y treasury rate has been finally increasing. In which situation is this theoretically problematic for the financial market?

Can someone help me understand a little bit the intuition behind? Just want to clarify that this comment was in the context of financial markets.

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  • $\begingroup$ Theoretically, the higher yield implies a higher discount rate on other financial assets (implying lower prices). The countervailing force is that higher forecast growth will often imply higher future profits. After that, it’s just opinions. $\endgroup$ Feb 10 at 17:38
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Theoretically there could be many reasons why interest rates increase. I will present you one possible interpretation (this is the one that is currently discussed in the news, see for example NBC):

Democrats have won the congress and accordingly they have the majority to enact their political agenda. Investors believe now this will increase deficit spending for pandemic relieve plans (like the stimulus payments to low income households) or for infrastructure investments. This directly increases the supply of treasuries and prices will fall accordingly. Prices going down means nothing else than an increase in the interest rate.

Why is this potentially problematic? Well in general it isn't, prices simply adjust to the shift in demand and supply. But in this concrete situation it means states have to pay higher interest rates for their debt and this may restrict possibilities to enact investments plans. During the current global pandemic Central banks try to keep interest rates low in order to give governments greater financial leeway.

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  • $\begingroup$ Why would would the fiscal stimulus "directly increase the supply of treasuries"? $\endgroup$
    – F0l0w
    Jan 11 at 1:24
  • $\begingroup$ I guess it's fair enough, the problematic is mainly that the reflation we're seeing might slow down, as given higher interest rates, there will be less circulating money (due to limited investment plans; higher cost of money for individual consumers, etc) $\endgroup$
    – F0l0w
    Jan 11 at 1:27
  • $\begingroup$ In short, I guess the question could've been summarized as: "The effect of increasing interest rates in the economy" (which generally economists were saying it will be bad for financial market) $\endgroup$
    – F0l0w
    Jan 11 at 1:28
  • $\begingroup$ @F0l0w government pays money, where does it get the money? It gets the money by selling treasuries. Isn't that what a treasury bond is? $\endgroup$
    – user253751
    Jan 11 at 12:08
  • $\begingroup$ But why would they issue a treasury if they can just print it? $\endgroup$
    – F0l0w
    Jan 11 at 13:46

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