Question

Suppose sustainable peace is reached in around the world, reducing military spending by the U.S. government. How would you expect this development to affect the US. bond market? As the government's need to issue bonds to finance the wars is IClick to select Click to select . shifting the (Click to selectl curve to the Click t the Click to selectgovernment bonds will and yields will ( (Click to select select Bond prices will [(Cick to select

Answer 1

The U.S. government raises capital and funds its military spending and other things on the government agenda by selling bonds to people. These same bonds are viewed as risk free since the government is supposed to be completely trust worthy and default free = > If sustainable peace was reached in the Middle East, the government would not need to raise as much capital to fund its military spending = > The result would be a in the supply in U.S treasury bonds & other government bonds the government shouldn�t issue bonds and pay excessive coupon payments if it doesn�t have to do so this would reduce the liquidity in the U.S bond market as there would be less stranding of bonds. A decreased liquidity would also the demand of bonds