Just so I understand how this works… interest rates on these bonds are going up because of low demand for the bonds? How does this translate to interest rates set by the fed? Do these have to go up to match? .4%?
Fed sets up very short term interest rates - specifically, overnight lending.
It certainly affects longer-term rates, but only indirectly. In effect, the lending rate for 10 year bonds, say (a common benchmark duration) is set entirely by the market. These are closely related - they operate in the same space - but are in principle independent decision-makers.
As to bond yields vs bond prices, t is easiest to see for new bonds - sold directly by the US govt. Unlike consumer loans, with bonds you know exactly how much you get repaid - periodic coupon and maturity. The variable is the price today paid for the bond. The government hopes to achieve a high price, raising as much cash as it can today (for the same future repayment cash flow), i.e. a low interest rate.
If the buyers of bonds - lenders - show up in small numbers, there is weak demand to buy, and the bond price is low. This translates to a high rate of interest - for a smaller upfront loan, you get more repayment down the line.
The same mechanism works in secondary markets - bond owners trading with each other.
In terms of how this affects the decision-making by the Fed - in principle, not at all. Fed is free to do whatever the like. But in practice, Fed is bound by the same forces as the bond traders, and bond yields are going up suggests the Fed will likewise have to raise rates. Or bond yields go up in anticipation to the Fed having to raise rates, etc.
It's complicated but I think 10 year rates are going up mostly because people think there'll be inflation and your dollars will buy less in ten years than they would have without the tariffs. Certainly 100% tariffs on China will make stuff from China cost more in the shops.
There may also be some panic selling by speculators or people worried about their bonds - higher market rates makes the prices of bonds fall.
The narrative I heard yesterday is that bond prices are falling because corporations are selling treasuries to raise cash (to deal with expected increases in prices and/or an economic slowdown, presumably).
When bond prices fall, interest earned on them rises.
It certainly affects longer-term rates, but only indirectly. In effect, the lending rate for 10 year bonds, say (a common benchmark duration) is set entirely by the market. These are closely related - they operate in the same space - but are in principle independent decision-makers.
As to bond yields vs bond prices, t is easiest to see for new bonds - sold directly by the US govt. Unlike consumer loans, with bonds you know exactly how much you get repaid - periodic coupon and maturity. The variable is the price today paid for the bond. The government hopes to achieve a high price, raising as much cash as it can today (for the same future repayment cash flow), i.e. a low interest rate.
If the buyers of bonds - lenders - show up in small numbers, there is weak demand to buy, and the bond price is low. This translates to a high rate of interest - for a smaller upfront loan, you get more repayment down the line.
The same mechanism works in secondary markets - bond owners trading with each other.
In terms of how this affects the decision-making by the Fed - in principle, not at all. Fed is free to do whatever the like. But in practice, Fed is bound by the same forces as the bond traders, and bond yields are going up suggests the Fed will likewise have to raise rates. Or bond yields go up in anticipation to the Fed having to raise rates, etc.