Sovereign government spending becomes more expensive when government bond yields for new issues rise.
Answer: False
The answer is False.
Note we are excluding non-sovereign governments such as the member states in the EMU which use a foreign currency.
For a sovereign government that issues its own currency there is no binding revenue constraint on government spending. The interest servicing payments come from the same source as all government spending - its infinite (minus one cent!) capacity to issue fiat currency. There is no "cost" - in real terms to the government doing this.
The concept of more or less expensive is therefore inapplicable to government spending.
The cost of government spending is the real resources that are deployed in the production of the goods and services being purchased rather than the fiscal balance entry in the Treasury books.
Rising bond yields do not measure these opportunity costs.
In macroeconomics, we summarise the plethora of public debt instruments with the concept of a bond. The standard bond has a face value - say $A1000 and a coupon rate - say 5 per cent and a maturity - say 10 years. This means that the bond holder will will get $50 dollar per annum (interest) for 10 years and when the maturity is reached they would get $1000 back.
Bonds are issued by government into the primary market, which is simply the institutional machinery via which the government sells debt to "raise funds". In a modern monetary system with flexible exchange rates it is clear the government does not have to finance its spending so the the institutional machinery is voluntary and reflects the prevailing neo-liberal ideology - which emphasises a fear of fiscal excesses rather than any intrinsic need.
Once bonds are issued they are traded in the secondary market between interested parties. Clearly secondary market trading has no impact at all on the volume of financial assets in the system - it just shuffles the wealth between wealth-holders. In the context of public debt issuance - the transactions in the primary market are vertical (net financial assets are created or destroyed) and the secondary market transactions are all horizontal (no new financial assets are created). Please read my blog - Deficit spending 101 - Part 3 - for more discussion on this point.
Further, most primary market issuance is now done via auction. Accordingly, the government would determine the maturity of the bond (how long the bond would exist for), the coupon rate (the interest return on the bond) and the volume (how many bonds) being specified.
The issue would then be put out for tender and the market then would determine the final price of the bonds issued. Imagine a $1000 bond had a coupon of 5 per cent, meaning that you would get $50 dollar per annum until the bond matured at which time you would get $1000 back.
Imagine that the market wanted a yield of 6 per cent to accommodate risk expectations (inflation or something else). So for them the bond is unattractive and they would avoid it under the tap system. But under the tender or auction system they would put in a purchase bid lower than the $1000 to ensure they get the 6 per cent return they sought.
The mathematical formulae to compute the desired (lower) price is quite tricky and you can look it up in a finance book.
The general rule for fixed-income bonds is that when the prices rise, the yield falls and vice versa. Thus, the price of a bond can change in the market place according to interest rate fluctuations.
When interest rates rise, the price of previously issued bonds fall because they are less attractive in comparison to the newly issued bonds, which are offering a higher coupon rates (reflecting current interest rates).
When interest rates fall, the price of older bonds increase, becoming more attractive as newly issued bonds offer a lower coupon rate than the older higher coupon rated bonds.
Further, rising yields may indicate a rising sense of risk (mostly from future inflation although sovereign credit ratings will influence this). But they may also indicated a recovering economy where people are more confidence investing in commercial paper (for higher returns) and so they demand less of the "risk free" government paper.
So you see how an event (yield rises) that signifies growing confidence in the real economy is reinterpreted (and trumpeted) by the conservatives to signal something bad (crowding out). In this case, the reason long-term yields would be rising is because investors were diversifying their portfolios and moving back into private financial assets. The yield reflects the last auction bid in the bond issue. So if diversification is occurring reflecting confidence and the demand for public debt weakens and yields rise this has nothing at all to do with a declining pool of funds being soaked up by the binging government!
But all of that has nothing to do with the real resource costs embodied in goods and services that governments purchase.
The following blogs may be of further interest to you: