The bond universe is divided between those that own and those that sell. There is *always* an *immediate* interest in a lower rate to realize a large capital gain. However, consider the case of an insurance company:
An increase in the rate means the market v alue of bonds( kept as assets that can be sold to raise money against a catastrophe ) goes down. Insruance companies have to keep a bunch of short-term money as an asset-valuation buffer for precisely this reason.
On the other hand, if you're an insurance company and you're being paid $10 billion a year in premiums and you're outlay for catastrophes and accidents is on average $8 billion then on the whsole the $2billion annually that yhou bank as assets (minus dividends and operating costs etc) will do better for you at a higher rate than a lower rate ceteris paribus. If the interest rate declines too much (you're not earning enough return on the invested assets to help you cover outlay) you have to "load" all your outlay on the premiums. In fact my life insurance policy has specific clauses which allow a higher premium to be charged in case of a market collapse.
So what is the "interest" of the insurance company: well, they make out OK with the capital gains, but they also like a high rate of return.
You want to buy a house cheap. But anyone can buy a house cheap in a "bad" neighborhood. What you really want is to buy a house cheap in a neighborhood where everyone else has paid dear. That means you get the "good" neighborhood at a discounted price.
So, are your "interests" furthered by housing prices high or low? You want low for you but notionally a "good neighborhood" means you want high for everyone else.
Basically when analyzing capitalism you have to get down to specific interests, inclujding specific portfolio objectives of "bondholders" which are too numerous a class to speak of generically. Speaking for myself, for example, a substantial portion of my retirement funds are going into bonds. I have a preference for a higher rate of return rather than a one-time capital gain.
Capitalism is based on atomistic pursuit of self-interest. That means that the determination of an "aggregate interest group" can be highly problematic. You have to decide what level of aggregation you want. Most US bondholders want the US govt to be solvent and pay regularly. On that 99% would agree (except for some would-be speculators). But on this rate or that rate, increase or decrease, interests will be mixed.
Michael Pollak wrote:
> In this week's _The Nation_, Jamie Galbraith says:
>
> <quote>
> By all accounts, the Fed is poised to raise interest rates, in a wholly
> symbolic anti-inflation gesture. If the logic of this escapes you, don't
> worry, there isn't one. The move is just a concession to the Fed's
> internal lobby of right-wing economists and pleaders for the banks and
> bondholders, who always want higher interest rates and who like to invent
> inflation threats to justify them.
> <endquote>
>
> It's not the first time I've heard this idea that bondholders are the
> force behind higher interest rates. But why is the bond market is always
> said to "rally" when interest rates go down, and said to take a hit when
> they go up? That makes it seem like bondholders would always want *lower*
> interest rates to increase their capital gains.
>
> Where am I going wrong? What is the easy solution to this seeming
> paradox?
>
> Michael
>
> __________________________________________________________________________
> Michael Pollak................New York City..............mpollak at panix.com
>
> WESTERN CIVILIZATION
>
> Of the modes of persuasion some are technical, others non-technical. By
> the latter I mean such things as are not supplied by the speaker but are
> there at the outset -- witnesses, evidence given under torture, written
> contracts, and so on.
>
> Aristotle, _Rhetoric_, Book I, 1355, 36-38.
> __________________________________________________________________________
-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
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