Interest Rates

The debt market, also known as the interest rate market, is a global market that reflects the supply and demand for government securities. Governments use this market to borrow funds from investors, to provide for the functional operations of their national government. Sovereign interest rates are generally considered the most liquid interest rates, but are far from the only rates traded in the global market place. Debt is issued by municipalities, by corporations, and to consumers for purchases of homes and cars.

The changes to interest rates are driven by a number of forces which include monetary policy as well as market sentiment. Monetary policy is the protocol used by the monetary authority of a country, to control the supply of money, and target a rate of interest which banks can lend to one another.

The official goal of monetary policy is generally set by the countries legislative branch and can include mandates such as stable prices and unemployment.

Central banks will often lower interest rates when growth is stagnant in an effort to stimulate and economy, and raise interest rates when growth is robust and prices are climbing. In the US for example, this rate is called the Federal Funds Target Rate.

The changes that a central bank makes to the Federal Funds rates will alter effect short term interest rates. Longer dated rates are influenced by market forces.