My super simplistic view on the failing Bond Market
1) Government
- needs to borrow $1,000
- offers a bond at 5%
- will offer 5% interest and return your money after 5 years
- the deal: you will get $1250 ($1000 + $250)
2) Bond Holder A
- accepts deal but…
- later thinks government will default on the debt or…
- can earn more than $1250 elsewhere. So…
- cuts losses and sells bond for $800 to Bond Holder B
3) Bond Holder B
- has a new deal: $250 on $800 = 6.25%
4) Government
- needs to borrow another $1,000 but…
- must match the market expectation of 6.25% which…
- convinces more bond holders that the government will default.
5) Rinse and repeat.
Ok-ish?