Assume that maturity markets are completely segmented. If the Treasury issues a large amount of long-term Treasury bonds to finance the budget deficit, this would place ____ pressure on _________-term yields.
A)upward; short
B)downward; short
C)upward; long
D)downward; long

Question

Assume that maturity markets are completely segmented. If the Treasury issues a large amount of long-term Treasury bonds to finance the budget deficit, this would place ____ pressure on _________-term yields.
A)upward;  short
B)downward; short
C)upward; long
D)downward; long

Quizplus · Accepted Answer

upward; longIssuing a large amount of long-term Treasury bonds increases the supply of these bonds, which typically leads to a decrease in their prices. When bond prices decrease, yields (which move inversely to prices) increase. Therefore, this action would place upward pressure on long-term yields, assuming markets are completely segmented and the impact is isolated to the segment of the maturity spectrum where the bonds are issued.

Assume That Maturity Markets Are Completely Segmented