Interest rates on government bonds were racing upward.

Indeed, the interest rate on inflation protected bonds has now become 0.5 , even for a five year maturity!

Bondholders gain when interest rates fall.

An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long term bonds today.

Investors are buying long term bonds at the current low interest rates because the interest rate on short term investments is now close to zero.

Domestic deflation means that the real interest rate on Japanese bonds is higher than the nominal rate.

The greatest risk to bond holders is that inflation will rise again, pushing up the interest rate on long term bonds.

But, by early spring, bond rates for Spain and Italy were again approaching unsustainable levels.

(Over the course of the euro s first decade, interest rate spreads between ten year government bonds nearly disappeared.)

The current small difference between the real interest rate on such bonds (2.1 for 30 year bonds) and the nominal interest rate on conventional 30 year Treasury bonds (now 4.6 ) implies that the market expects only about 2.5 inflation over the next three decades.

The substantial surge in the interest rate on Greek bonds relative to German bonds in the past few weeks shows that the market now regards such a default as increasingly likely.

NEW HAVEN Real long term interest rates that is, interest rates on inflation protected bonds have fallen to historic lows in much of the world.

Corporations are allowed to deduct interest payments on bonds, but stock dividends are effectively taxed at the both the corporate and the individual level.

The fundamental benchmark interest rates in modern financial markets are the so called risk free rates on government bonds.

That predictable dollar decline makes the relative return on holding dollar bonds even lower than the interest rate differential alone implies.

In this case, the price of loanable funds is the real interest rate. An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long term bonds today.

If Greece had remained outside the eurozone and retained the drachma, the large increased supply of Greek bonds would cause the drachma to decline and the interest rate on the bonds to rise.

Within a couple years, interest rates on long term US Treasury notes could easily rise 3 4 , with interest rates on other governments paper rising as much, or more.

Either way, interest rates would have to fall in order for world bond markets to clear.

Given the current expected inflation rate of 2 , the real rate on ten year bonds is still less than 1 .

It could do so by buying Italian and Spanish bonds in the secondary market with the pre announced intention of keeping their sovereign interest rates below a certain threshold for a certain time.

But the protection against inflation does not prevent a loss of value if real interest rates rise, depressing the value of the bonds.

French government bond interest rates fell 30 to record lows, less than 50 basis points above German government bond rates.

Investors naturally respond to unsustainable debt by selling bonds until interest rates become ridiculous.

But when the interest rate on a ten year bond rises to 5 , the bond s price falls from 100 to 69.

And the international bond market has expressed its approval by cutting interest rates on Italy s ten year bonds to 4.8 , and on Spain s to 5.5 .

The downgrade could, moreover, force the US Treasury to raise the interest rate on new bonds, in which case China would stand to gain.

If interest rate spreads on Spanish and Italian government bonds are any guide, bondholders are no longer betting on a eurozone breakup.

As soon as economic activity in the United States revives, interest rates on government bonds are liable to shoot up indeed, the yield curve is likely to steepen in anticipation.

The Fed is unlikely to be able to reduce long term rates any further. Their level is now so low that many investors rightly fear that we are looking at a bubble in bond and stock prices.

The widening spreads between the interest rate on German eurobonds and some of the other countries euro bonds show that global bond markets take this risk seriously.

But German, French, Spanish, and even Greek bonds all carried roughly the same interest rate, so they were deemed equivalent.

In the US, the interest rate on government bonds now rises from 1.80 at five years to 2.86 for 10 year bonds and 3.70 for 30 year bonds.

If foreign holders of dollar bonds become concerned that the unsustainability of America s situation will lead to higher interest rates and a weaker dollar, they will want to sell dollar bonds.

With interest rates on government bonds in the US, Japan, the United Kingdom, Germany, and Switzerland at ridiculously low levels, investors are on a global quest for yield.

After all, the Fed was careful to indicate that it would maintain its near zero interest rate policy and would not unload its bond holdings.

The IMF could use its bond issuing power to purchase GDP indexed bonds from national governments, thereby providing the new global reserve assets with backing and interest generating capacity, while creating an incentive for governments to issue them.

Interest rates on Russia s bonds have risen by 2 3 percentage points, and many Russian creditors no longer have access to international capital markets.

The ECB s announcement of a new program to purchase sovereign bonds has lowered market interest rates.

It was not a mandate to buy, or announce to buy, sizeable stocks of bonds in order to reduce long term interest rates.

If interest rates were lowered beyond a certain point, the dollar would come under renewed pressure and long term bonds would actually go up in yield.

Indeed, despite the large government deficit and the enormous government debt now close to 200 of GDP the interest rate on 10 year Japanese government bonds is just 1 , the lowest such rate in the world.

Investors are buying long term bonds at the current low interest rates because the interest rate on short term investments is now close to zero. In other words, buyers are getting an additional 2 current yield in exchange for assuming the risk of holding long term bonds.

Ordinarily, a sharp rise in oil prices quickly translates into higher inflation expectations, followed by rising interest rates at all maturities.

The lower long term interest rates contributed to the small 4 rise in the S P 500 share price index over the same period.