Rand Paul's explanation for low bond yields

Economics Economics Questions
1

I copied the following from Ron Paul’s website, but I don’t really understand its significance. Can someone explain it to me?

Rand Paul: I think they’ve discounted what’s going to happen. But the other thing is we had a banker recently this week who said all of the institutions that hold treasury bills are going to change the rules. They can hold AAA or government bonds.

Neil Cavuto: Oh, so you got some legal room.

Rand Paul: So what they’re saying is when government bonds are junk, you’ll still be able to hold them.

Neil Cavuto: Yea, that’s a big (?) though, because right now technically you can’t.

Rand Paul: Yea, that’s what they’ve been worried about, so they’re changing the rules. But I love the way they’re putting it: “AAA or government bonds”.

http://www.ronpaul.com/2011-07-29/ron-paul-and-rand-paul-on-the-debt-negotiations/

2

There are rules/regulations that limit the securities that banks can hold to being AAA. If the US loses its AAA rating the banks would be bared from holding them. Since it is likely that the rating is going to be downgraded regardless of the joke of a bill they passed, they changed the rules so that the banks an still hold the government securities that are no longer AAA rated.

3

Thanks for that explanation.

Though it raises a related question. If govt bonds were downgraded, wouldn’t banks possibly offload them in preference to other securities that have retained their AAA status?

4

If govt bonds were downgraded, wouldn’t banks possibly offload them in preference to other securities that have retained their AAA status?

Yes, if they find a sucker to buy them.