Real Currency/Bond Yields and Fiscal Space

Do Real Yields in currency Accounts Increase Fiscal Space?

Real yields certainly make assets more attractive to markets, having a consistent history of growth and strong performance, is very encouraging to traders trying to bet on future trends, who influence relative asset value today, and therefore the sensitivity to asset issuance.

Importantly, this issue is true across the board for financial assets, and not specific to currencies and bonds.

Importantly, I think the biggest notion to consider for this question is asset complementarity. Without sufficient public investment, the yields of privately issued assets are greatly diminished, at least that is the public value hypothesis.

So who can or should be willing to take a loss by holding these subpar performing currency asset accounts, whether that is bonds, bills, cash, etc?

I think the answer to this is pretty straightforward, those who will hold the lowest performing assets, are those who are also holding the highest performing assets anyway. So in other words, if they were to buy more higher performing assets, they would simply reduce the performance of those high yield assets and increase their volatility, by pumping up their valuation to a less stable level. And certainly this does happen to some extent. But I would argue we should expect this "overbidding" to peter out well before those asset classes reach a relative value share sufficient to equilibriate the rate of return across asset classes.