The government prints money and buys government bonds with it. And other assets. When you have infinite amounts of money, you can dictate the risk premium.
> When you have infinite amounts of money, you can dictate the risk premium.
But how? If you're an investor who is considering buying government bonds, how can the government dictate the interest rate that you are willing to accept in return for buying the bonds?
Sorry, that's not how it works. The governments runs an auction where the bonds are sold to investors. That sets the market rate. The government would not buy its own bonds in the auction (it wouldn't make sense) and cannot force investors to buy the bonds at a particular rate.
In Europe, the government does buy its own bonds. Via the central bank. They print the money. Hold it for a few days. Then buy government bonds with it.
Read what the european central bank (ECB) writes about it:
The central bank buys bonds in the secondary market, and any effect on the risk premium is only indirect (investors perceive the bonds as being safer). This is completely different from the government "dictating the risk premium". The risk premium is the spread deemed necessary by the market to compensate for credit risk, and as such it can't be dictated by anyone.
Then there is also the downstream effects of buying these "safe" bonds on the secondary market: strip mining the "highest" quality collateral out of markets, and making markets ever more reliant upon fewer on tradeable cusips…
Yet, i've seen defi protocols that tried to fix the rate + maturity of said "bonds" they were offering and be complete baffled why demand for them changed when market conditions changed… wish there were more voices like yours in the sea of fecal matter floating around in the ecosystem…
