How do treasury rate effect economy?

2 Replies

I read the article about the T rates and trying to understand some ideas that they propose. It says when economy is strong and expanding there are lots of opportunities for investors, so they demand a higher returns and buy less treasuries which drives treasury rate. 

1. Does it mean that the reason why treasury rate falls is that the economy becomes weaker? Is it the only reason and what could be other reasons?

2. When T rate falls, so the other interest rates.

3. That means that a buyer can buy more and pay less interest of that.

4. That means that RE market strengthens (Why? Just the fact that people CAN buy houses at a lower rate, and people buy more of those doesn't mean that RE market became stronger? Or it does?

5. If RE market strengthens it has a positive effect on the economy(why?) and creates more jobs(why?)

1. Does it mean that the reason why treasury rate falls is that the economy becomes weaker? Is it the only reason and what could be other reasons?

- This is a very complex question that takes a long time to understand. It's very unlikely that any answer in a forum will give you an acceptable understanding or the interactions between short term interest rates, the real economy, and markets.

2. When T rate falls, so the other interest rates.

- Short term interest rates are set by Central Banks. In the US, that's the Federal Reserve. The overnight rate has a strong influence on longer dated maturities. The recent yield curve inversion shows that other factors also play a roll. Some of those are market liquidity, investor and consumer expectations, supply and demand money and government debt.

3. That means that a buyer can buy more and pay less interest of that.

- Yes. Lower interest rates mean lower interest payments.

4. That means that RE market strengthens (Why? Just the fact that people CAN buy houses at a lower rate, and people buy more of those doesn't mean that RE market became stronger? Or it does?

- The real estate market doesn't always strengthen when short term interest rate decline. Since there are various reasons that long term interest rates decline, there are various potential outcomes.

5. If RE market strengthens it has a positive effect on the economy(why?) and creates more jobs(why?)

- The real estate market provides millions of jobs to contractors, builders, plumbers, etc. Also, most Americans have a significant amount of their personal wealth attached to their primary residence. Increases in net worth lead to the wealth effect, normally causing an uptick in large personal expenditures.

Treasury yields are driven by supply and demand.  When investors are concerned about the economy, demand for safe-haven Treasuries go up and the yield goes down.  When investors are bullish on the economy, they are less interested in Treasuries, demand goes down, and yields go up.

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