Financial Markets and Institutions (2-downloads)

Reading the Wall Street Journal “Credit

Markets” Column

Now that we have an understanding of how supply and demand determine prices

and interest rates in the bond market, we can use our analysis to understand dis-

cussions about bond prices and interest rates appearing in the financial press.

Every day, the Wall Street Journal reports on developments in the bond mar-

ket on the previous business day in its “Credit Markets” column, an example of

which is found in the Following the Financial News box on the next page. Let’s 

see how statements in the “Credit Markets” column can be explained using our

supply-and-demand framework.

The column featured in the Following the Financial News box begins by stating

that Treasury prices soared as the euro continued its decline and investors expressed

concerns about debt problems in Euro zone. This is exactly what our demand and

supply analysis says should happen.

The column describes the market as being very nervous and the increase in

uncertainty about developments in Europe and elsewhere mean that U.S. Treasuries

became less risky relative to foreign assets, which would cause the demand curve for

Treasuries to shift to the right. The results would be an increase in the price of

Treasury bonds, just as the column suggests.

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