I have a question on the effect of government auction on bonds?

Q1 - If there is a government auction 鈥?more bonds are sold to the system and money is taken out from the system and given to the govrnmentt. So a govt auction leads to lower Liquidity and this is bad for the bond markets. Is this correct ?



Q2 鈥?If there is no government auction coming then there is more liquidity. This will help bonds more at the shorter end than the longer end. What does this mean ?



Q3 - Large borrowing program by the government is bad for the bond market. But more for the longer end. What does this mean ?I have a question on the effect of government auction on bonds?
Q1: Its more complicated than that, the government can infuse liquidity in a number of ways, including lowering bank reserve requirements, purchasing securities in the open market, lowering the fed funds rate. Also outstanding treasuries are maturing at various stages so there is a constant flow in and out of the market. So a government auction is essentially a government request for a loan, but it is not the only way to infuse liquidity into the market.



Q2: Not necessarily there are a number of other investment vehicles like STRIPS that will always essentially keep inventory higher on the lower end, the idea is to provide incentive for investors to purchase on different points in the curve through interest rate moves.



Q3: Increased government borrowing effects the long end more because it increases the cost of borrowing, which causes rates to rise, and that has the most significant impact on the long end because I have more interest rate risk as measured through duration on the long end. Essentially if I buy a 30 year treasury today at a 3% yield and the government issues a new 30 year bond with a rate of 5% then the value of my bond declines much more severely than on the short end because I'm stuck with it longer, the short end doesn't experience as great a decline because it has less duration risk and reinvestment risk.