Do governments support their own bonds when their value goes down?
Companies do not support their stock. Once the security is out on the wild (market), its price fluctuates according to what investors think they are worth. Support is a whole different concept, financially speaking: Support or support level refers to the price level below which, historically, a stock has had difficulty falling. It is the level at which buyers tend to enter the stock. So it is the lowest assumed price for that stock. Once it reaches its price, buyers will rush to the stock, raising its price. The company wants to keep the stock price at acceptable levels, as it can be seen as the general view of the company's health. Also several employees/executives in the company have stock or stock options, so it is in their interest to keep their stock price up. A bond that goes down in value may indicate a believe the bond issuer (government in this case) won't honor the bond when it matures. As for bonds, there is a wealth of reading in this site: Can someone explain how government bonds work? Who sets the prices on government bonds?  Basic understanding of bonds, values, rates and yields who issued stock typically support it when the stock price go down.  No, not many company do that as it is uneconomical for them to do so. Money used up in buying back equity is a wasteful use of a firm's capital, unless it is doing a buyback to return money to shareholders. Does the same thing happen with government bonds?  Not necessarily again here. Bond trading is very different from equities trading. There are conditions specified in the offer document on when an issuer can recall bonds(to jack up the price of an oversold bond), even government bonds have them.  The actions of the government has a bigger ripple effect as compared to a firm. The government can start buying back bonds to increase it's price, but it will stoke inflation because of the increase in the supply of money in the market, which may or mayn't be desirable. Then again people holding the bond would have to incentivized to sell the bond. Even during the Greek fiasco, the Greek government wasn't buying Greek bonds as it had no capital to buy. Printing more euros wasn't an option as no assets to back the newly printed money and the ECB would have stopped them from being accepted.  And generally buying back isn't useful, because they have to return the principal(which might run into billions, invested in long term projects by the government and cannot be liquidated immediately) while servicing a bond is cheaper and investing the proceeds from the bond sale is more useful while being invested in long term projects. The government can just roll over the bonds with a new issue and refrain from returning the capital till it is in a position to do so. Without getting to hung-up on terminology here, the management of a company will often attempt to keep stock prices high because of a number of reasons: Ideally companies keep prices up through performance.  In some cases, you'll see companies do other things spending cash and/or issuing bonds to continue to pay dividends (e.g. IBM), or spending cash and/or issuing bonds to pay for stock buybacks (e.g. IBM).  These methods can work for a time but are not sustainable and will often be seen as acts of desperation.  Companies that have a solid plan for growth will typically not do much of anything to directly change stock prices. Bonds are a bit different because they have a fairly straight-forward valuation model based on the fact that they pay out a fixed amount per month.  The two main reason prices in bonds go down are: The key here is that bonds pay out the same thing per month regardless of their price or the price of other bonds available.  Most stocks do not pay any dividend and for much of those that do, the main factor as to whether you make or lose money on them is the stock price. The price of bonds does matter to governments, however.  Let's say a country successfully issued some 10 year bonds last year at the price of 1000.  They pay 1% per month (to keep the math simple.)  Every month, they pay out $10 per bond.  Then some (stupid) politicians start threatening to default on bond payments.  The bond market freaks and people start trying to unload these bonds as fast as they can.  The going price drops to $500.  Next month, the payments are the same.  The coupon rate on the bonds has not changed at all.  I'm oversimplifying here but this is the core of how bond prices work. You might be tempted to think that doesn't matter to the country but it does.  Now, this same country wants to issue some more bonds.  It wants to get that 1% rate again but it can't.  Why would anyone pay $1000 for a 1% (per month) bond when they can get the exact same bond with (basically) the same risks for $500?  Instead they have to offer a 2% (per month) rate in order to match the market price. A government (or company) could in fact put money into the bond market to bolster the price of it's bonds (i.e. keep the rates down.)  The problem is that if you are issuing bonds, it's generally (caveats apply) because you need cash that you don't have so what money are you going to use to buy these bonds?  Or in other words, it doesn't make sense to issue bonds and then simply plow the cash gained from that issuance back into the same bonds you are issuing.  The options here are a bit more limited.  I have to mention though that the US government (via a quasi-governmental entity) did actually buy it's own bonds.  This policy of Quantitative Easing (QE) was done for more complicated reasons than simply keeping the price of bonds up.
"So ""Operation Twist"" is actually a pretty simple concept. Here's the break down: The Fed sells short-term treasury bonds that it already holds on its books. Short-term treasury bonds refer to - bonds that mature in less than three years. Then: Uses that money to buy long term treasury bonds. Long-term treasury bonds refer to -  bonds that mature in six to 30 years The reason: The fed buys these longer-term treasuries to lower longer-term interest rates and encourage more borrowing and spending. Diving deeper into how it works: So the Fed can easily determine short-term rates by using the Federal funds rate this rate has a direct effect on the following: However this does not play a direct role in influencing the rate of long-term loans (what you might pay on a 30-year fixed mortgage). Instead, long-term rates are determined by investors who buy and sell bonds in the bond market, which changes daily. These bond yields fluctuate depending on the health of the economy and inflation. However, the Fed funds rate does play an indirect role in these rates. So now that we know a little more about what effects what rate, why does lower long-term rates in treasuries influence my 30yr fixed mortgage? Well when you are looking for a loan you are entering a market and competing against other people, by people I mean anyone looking for money (e.g: my grandmother, companies, or the US government). The bank that lends you money has to decide weather the deal you are offering them is better then another deal on the market. If the risk of lending to one person is the same as the risk of lending to another, the bank will make whichever loan yields the higher interest rate. The U.S. government is considered a very safe borrower, so much so that government bonds are considered almost “risk free”, but because of the lower risk the rate of return is lower. So now the bank has to factor in this risk and make its decision weather to lend you money, or the government. So, if the government were to go to the market and buy its own long-term bonds it is adding demand in the market causing the price of the bond to rise in effect lowering the interest rate (when price goes up, yield goes down). So when you go back and ask for a loan it has to re-evaluate and decide ""Is it worth giving this money to Joe McFreeBeer instead and collecting a higher yield?"" (After all, Joe McFreeBeer is a nice guy). Here's an example: Lets say the US has a rating of 10 out of 10 and its bonds pay a 2% yield. Now lets say for each lower mark in rating the bank will lend at a minimum of 1% higher and your rating is 8 of 10. So if you go to market, the lowest rate you can get will be 4%. Now lets say price rises on the US treasury and causes the rate to go down by 1%. In this scenario you will now be able to get a loan for 3% and someone with a rating of 7 of 10 would be able to get that 4% loan. Here's some more info and explinations: Why is the Government Buying Long-Term Bonds? What Is 'Operation Twist'? A Q&A on US Fed Program Federal Reserve for Beginners Federal Open Market Committee" "I don't think the advice to take lots more risk when young makes so much sense. The additional returns from loading up on stocks are overblown; and the rocky road from owning 75-100% stocks will almost certainly mess you up and make you lose money. Everyone thinks they're different, but none of us are. One big advantage of stocks over bonds is tax efficiency only if you buy index funds and don't ever sell them. But this does not matter in a retirement account, and outside a retirement account you can use tax-exempt bonds. Stocks have higher returns in theory but to have a reasonable guarantee of higher returns from them, you need around a 30-year horizon. That is a long, long time. Psychologically, a 60/40 stocks/bonds portfolio, or something with similar risk mixing in a few more alternative assets like Swenson's, is SO MUCH better. With 100% stocks you can spend 10 or 15 years saving money and your investment returns may get you nowhere. Think what that does to your motivation to save. (And how much you save is way more important than what you invest in.) The same doesn't happen with a balanced portfolio. With a balanced portfolio you get reasonably steady progress. You can still have a down year, but you're a lot less likely to have a down decade or even a down few years. You save steadily and your balance goes up fairly steadily. The way humans really work, this is so important. For the same kind of reason, I think it's great to buy one fund that has both stocks and bonds in there. This forces you to view the thing as a whole instead of wrongly looking at the individual asset class ""buckets."" And it also means rebalancing will happen automatically, without having to remember to do it, which you won't. Or if you remember you won't do it when you should, because stocks are doing so well, or some other rationalization. Speaking of rebalancing, that's where a lot of the steady, predictable returns come from if you have a nice balanced portfolio. You can make money over time even if both asset classes end up going nowhere, as long as they bounce around somewhat independently, so you'll buy low and sell high when you rebalance. To me the ideal is an all-in-one fund that aims for about 60/40 stocks/bonds level of risk, somewhat more diversified than stocks/bonds is great (international stock, commodities, high yield, REIT, etc.). You can just buy that at age 20 and keep it until you retire. In beautiful ideal-world economic theory, buy 90% stocks when young. Real world with human brain involved: I love balanced funds. The steady gains are such a mental win. The ""target retirement"" funds are not a bad option, but if you buy the matching year for your age, I personally wish they had less in stocks. If you want to read more on the ""equity premium"" (how much more you make from owning stocks) here are a couple of posts on it from a blog I like: Update: I wrote this up more comprehensively on my blog," Bonds by themselves aren't recession proof.  No investment is, and when a major crash (c.f. 2008) occurs, all investments will be to some extent at risk. However, bonds add a level of diversification to your investment portfolio that can make it much more stable even during downturns. Bonds do not move identically to the stock market, and so many times investing in bonds will be more profitable when the stock market is slumping.  Investing some of your investment funds in bonds is safer, because that diversification allows you to have some earnings from that portion of your investment when the market is going down. It also allows you to do something called rebalancing.  This is when you have target allocation proportions for your portfolio; say 60% stock 40% bond.  Then, periodically look at your actual portfolio proportions.  Say the market is way up - then your actual proportions might be 70% stock 30% bond.  You sell 10 percentage points of stocks, and buy 10 percentage points of bonds. This over time will be a successful strategy, because it tends to buy low and sell high. In addition to the value of diversification, some bonds will tend to be more stable (but earn less), in particular blue chip corporate bonds and government bonds from stable countries.  If you're willing to only earn a few percent annually on a portion of your portfolio, that part will likely not fall much during downturns - and in fact may grow as money flees to safer investments - which in turn is good for you. If you're particularly worried about your portfolio's value in the short term, such as if you're looking at retiring soon, a decent proportion should be in this kind of safer bond to ensure it doesn't lose too much value.   But of course this will slow your earnings, so if you're still far from retirement, you're better off leaving things in growth stocks and accepting the risk; odds are no matter who's in charge, there will be another crash or two of some size before you retire if you're in your 30s now. But when it's not crashing, the market earns you a pretty good return, and so it's worth the risk. "To try and address your 'how'  it goes a bit like this. You need to first assess how your stuff is invested, if for example half is in stocks, and the other half is in bonds, then you will need to calculate a 'blended' rate for what are reasonable 'average return' for both. That might mean looking at the S&P500 or Russell 3000 for the stock portion, and some bond index for that portion, then 'blend the rates', in this case using a formula like this then compare the blended rate with the return in your IRA. It is generally a lot more useful to compare the various components of your total return separately, especially if you investing with a particular style such as 'agressive growth' or you are buying actual bonds and not a bond fund since most of the bond oriented indexes are for bond funds, which you can't really compare well with buying and holding bonds to maturity. Lets say your stock side was two mutual funds with different styles, one 'large cap' the other 'aggressive growth'.  In that case you might want to compare each one of those funds with an appropriate index such as those provided by Morningstar  If you find one of them is consistently below the average, you might want to consider finding an alternative fund who's manager has a better track record (bearing in mind that ""past performance...."") For me (maybe someone has a good suggestion here) bonds are the hard thing to judge.  The normal goal of actually owning bonds (as opposed to a fund) is to retain the entire principal value because there's no principal fluctuation if you hold the bond to maturity (as long as you choose well and the issuer doesn't default)   The actual value 'right now' of a bond (as in selling before maturity) and bond funds, goes up and down in an inverse relationship with interest rates.  That means the indexes for such things also go up and down a lot, so it's very hard to compare them to a bond you intend to hold to maturity. Also, for such a bond, there's not a lot of point to 'switch out' unless you are worried about the issuer defaulting.  If rates are up from what you are getting on your bonds, then you'll have to sell your bond at a discount, and all that happens is you'll end up holding a different bond that is worth less, but has higher interest (basically the net return is likely to be pretty much the same).  The better approach there is generally to 'ladder' your maturity dates so you get opportunities to reinvest at whatever the prevailing rates are, without having to sell at a discount..  anyway the point is that I'm not sure there's a lot of value to comparing return on the bond portion of an IRA unless it's invested in bond funds (which a lot of people wanting to preserve principal tend to avoid)" It wouldn't surprise me to see a country's return to show Inflation + 2-4%, on average. The members of this board are from all over the world, but those in a low inflation country, as the US,Canada, and Australia are right now, would be used to a long term return of 8-10%, with sub 2% inflation.  In your case, the 20% return is looking backwards, hindsight, and not a guarantee. Your country's 10 year bonds are just under 10%. The difference between the 10% gov bond and the 20% market return reflects the difference between a 'guaranteed' return vs a risky one.  Stocks and homes have different return profiles over the decades. A home tends to cost what some hour's pay per month can afford to finance.  (To explain - In the US, the median home cost will center around what the median earner can finance with about a week's pay per month. This is my own observation, and it tends to be correct in the long term. When median homes are too high or low compared to this, they must tend back toward equilibrium.)  Your home will grow in value according to my thesis, but an investment home has both value that can rise or fall, as well as the monthly rent. This provides total return as a stock had growth and dividends.  Regardless of country, I can't predict the future, only point out a potential flaw in your plan. No, there isn't. There are a number of reasons that institutions buy these bonds but as an individual you're likely better off in a low-yield cash account. By contrast, there would be a reason to hold a low-yield (non-zero) bond rather than an alternative low-yield product. "Beyond the yield/price relationship, a good intuitive way to understand it is just this: these people control a substantial amount of money that could be essentially loaned to governments.   If they feel a particular policy is likely to lead to inflation or default, they may decide not to loan that country any more money.  All else being equal, with a smaller supply of possible borrowers, the country will have to pay higher interest to fund a particular amount of debt. Furthermore they may loudly publicly announce that they will no longer lend to that country, in which case other participants may be persuaded that they too should no longer lend at the going rate.  What's more, this is somewhat self-fulfilling: as rates go up, the country will spend more money servicing its debt, and will in fact become a worse risk.   So I think the thing that gives them their ""vigilante"" nature is that governments worry they will round up a posse and things will run away.  As far as actual incentives, I would welcome more information but I think the main bond vigilante case is that they are basically long on the country but want it to tighten up its policy so their existing holdings don't decline." "Yes, but the rates at which they're borrowing make all the difference.  Japan's central bank is borrowing at about 2 percent on a 30 year bond, and Greece is borrowing at 18 percent. Japan would thus be paying 4.6% of GDP on debt service for government borrowing, while Greece would thus be paying 27% (assuming that all current bonds could be converted to current rates).   [Japan](http://www.bloomberg.com/markets/rates-bonds/government-bonds/japan/), [Greece](http://www.ecb.int/stats/money/long/html/index.en.html).   Further, as many other commenters have noted, Japan retains the ability to print money and thus inflate their debt away, while Greece relies on the European Central Bank, which would not hyperinflate the entire Eurozone to help out Greece's government.  As a comparison, the US is currently paying 1.3% of its GDP on government debt service.   (My calculations are amateur. Please correct me if I'm wrong.)  As [Dean Baker notes](http://www.cepr.net/index.php/blogs/cepr-blog/the-devasting-interest-burden-of-the-debt):  ""It is important to remember that most of the people in Washington debates on economic policy do not know much economics. They tend not to be very good at arithmetic either. That is why they were blindsided by the collapse of the $8 trillion housing bubble that wrecked the economy.  As we get endless pontification about the crushing debt burden it is worth touching base with reality on occasion. In that spirit, CEPR brings you the latest data and projections on the ratio of the federal government's interest payments to GDP, courtesy of the Congressional Budget Office (CBO).  [T]he interest to GDP ratio is currently at a crushing 1.3 percent, near the post World War II low. However this figure overstates the burden somewhat. Last year the Federal Reserve Board refunded almost $80 billion to the Treasury. This was interest earned on government bonds and other assets it now holds. That leaves a net interest burden of 0.8 percent of GDP, by far the lowest of the post World War II era.""  **TL;DR**: what matters is not total size of debt alone, but also borrowing costs and ability to inflate the debt away. Japan is paying very little on its large debt; Greece is paying a lot.   **TL;DR TL;DR**: I'd like to borrow a few trillion dollars at 2%, too."