Question

How can bond traders manipulate / affect the economy if they wanted?

Answer 1

The demand and supply of bonds in an economy directly impacts interest rates which further has a huge impact on the economy. Lower interest rates stimulate the economy as they give a boost to demand and investment. Higher interest rates have the opposite effect.

Bond traders are essentially investors that provide very crucial liquidity in the financial markets. Imagine bond traders suddenly being reluctant to buy bonds. This would lower bond prices and push interest rates up which can lead to an economic slowdown. On the flip side, if traders were suddenly rushing to buy bonds, bond prices would go up and interest rates would go down. This is one way.

Another way a bond trader can manipulate the economy or a particular sector of an economy is by dumping bonds either of a government or of a corporation at cheap prices. There have been many cases in the past when one bond trader dumped shares of companies in a particular sector or of governments and other market participants and traders followed suit leading to a domino effect. This is because other players start to think that that one player had some inside information and start acting out of fear. This dumping in turn leads to high cost of raising money for these institutions which can have grave consequences.