What is Treasury Yield?
Treasury securities are debt obligations of the U.S. government and are backed by its full faith and credit. The Department of the Treasury (Treasury) raises funds to finance the federal government’s deficits primarily through the sale of Treasury securities to the public in the domestic and international capital markets.
U.S. Treasuries have maturities ranging from a few days to 30 years and pay interest at fixed, variable, or floating rates. The market value of a particular Treasury security depends on many factors, including prevailing market interest rates, perceived credit risk, and expected changes in both market interest rates and credit risk.
To measure the return on a particular Treasury security, one can calculate its yield, which reflects both the current interest rate paid by that security and any capital gains or losses realized since the purchase date if held to maturity. Yields on Treasuries with different maturities will differ based on these factors as well as expectations about future interest rates.
The term “yield” can be confused with “coupon rate,” which is the stated interest rate on a security that does not reflect any capital gains or losses since purchase. For example, if you buy a bonds with a $1,000 face value and a 4% coupon rate that matures in 10 years, you will receive $40 per year in interest payments until maturity regardless of changes in market conditions. In contrast, yield reflects current market conditions and changes therein since purchase date. For example, if you bought that same bond for $920 (to produce a 4% yield), then your return would increase if market yields fell after your purchase (the price of your bond would increase as other bonds with lower yields became more attractive to investors).
The size of your position would also affect your return; all else being equal, you’d make more money on a 5% yield if you owned $10 million of bonds than if you owned just $1 million because you’d receive five times as much income
How is Treasury Yield Calculated?
Assuming a $10,000 face value bond, the calculation is:
$10,000 x (coupon rate / 100) = dollar amount of coupon payments per year
$10,000 – price of the bond = market discount
discount rate = [(coupon payments + market discount) / face value of the bond] x 2
What Factors Affect Treasury Yield?
Various factors affect the yield on U.S. Treasury securities, which are the bonds issued by the federal government to finance its debt. These include the overall level of interest rates, economic conditions, and federal Reserve actions.
The most important factor influencing Treasury yields is the general level of interest rates in the economy. When overall interest rates are relatively low, as they are now, investors are willing to accept lower yields on government bonds in return for the stability and safety that these investments provide.
Other factors that can affect yields include inflationary expectations, perceptions regarding the creditworthiness of the issuing government, and changes in demand from global investors. The actions of the Federal Reserve also play a role in setting rates; for instance, when the Fed buys Treasuries in order to expand the money supply, this tends to drive down yields.
How Does Treasury Yield Affect Investors?
Treasury yield is the interest rate that the U.S. government pays to borrow money for a specific period of time. This rate directly affects short-term interest rates, which in turn affect the yield on other investments, such as corporate bonds and mortgage rates.
The yield on U.S. Treasury securities influences other interest rates in the economy. For example, when yields go up, banks’ prime lending rates usually follow suit. The prime rate is the interest rate that banks charge their most creditworthy customers, and it often serves as a benchmark for other loans, such as credit card rates and auto loans.
The relationship between treasury yield and mortgage rates is more complicated. Mortgage rates are influenced by both the yield on 10-year Treasury securities and the Fed Funds Rate, which is the rate at which banks lend money to each other overnight. When yields rise, mortgage rates usually follow suit, but the effect is not immediate because mortgages are long-term loans.
In general, rising yields are good for savers and bad for borrowers. That’s because when yields go up, so do deposit rates (the interest rates paid on savings accounts) and loan rates (the interest charged on borrowing).View comparable articles on article about treasury inflation protected securities (tips) vs. coupon treasuries, or article what is unique about i-bonds?.
To conclude, a treasury yield is the percentage of return an investor receives from holding a government bond. Yields can be affected by many factors, including inflation, central bank policy, and global events. While yields are not guaranteed, they can provide stability for investors seeking a steady income stream.