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Kimberly Amadeo

How Treasury Notes Affect the Dollar and You

By April 13, 2010

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A reader asked how Treasury notes affect the dollar's value.  A higher Treasury yield can trigger a bit more demand for the dollar, because currency traders know they will get more return for investing in dollar-denominated assets than foreign ones. For example, the 10-year Treasury note yield was at 4.01% on April 5 and the dollar was worth .741 euros. This yield attracted investors to dollars, driving the dollar's value up to .75 euros on April 9.

Treasury notes and bonds are sold at auction by the Treasury Department, which sets a fixed face value and interest rate. If there is a lot of demand for the note or bond, it will go to the highest bidder at a price above the face value. This decreases the yield, because the government will only pay back the face value plus the stated interest rate. If, on the other hand, there is not a lot of demand, then the bidders will pay less than the face value, which will increase the yield. That is why yields always move in the opposite direction of Treasury note prices.

Treasury note and bond yields change every day, because hardly anyone keeps them for the full term. Instead, they are resold on the open market. Therefore, if you hear that bond prices dropped, then you know there is not a lot of demand for Treasury notes and bonds, and that the yields increased.

Often Treasury notes are sold for different periods of time,and have different names as follows:

  • Treasury bills are issued for terms less than a year.
  • Treasury notes are issued in terms of 2, 3, 5, and 10 years.
  • Treasury bonds are issued in terms of 30 years, and were reintroduced in February 2006.

The 10-year note is the most widely traded, and so has the biggest impact on the dollar. The 30-year bond has the most impact on fixed-rate, 30-year conventional mortgages. Treasury bills affect short-term debt and adjustable rate mortgages. The yields on these bills usually closely follow the fed funds rate.

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Comments

April 14, 2010 at 11:53 am
(1) Collin says:

When yield increase, people will demand for more currency so as to buy the bond and this in turn lead to an appreciation of dollar?

Thanks.

April 14, 2010 at 12:21 pm
(2) Kimberly Amadeo says:

People will want to buy any dollar-denominated asset, not just bonds, so this drives demand for dollars, yes.

August 13, 2011 at 4:04 am
(3) Sujoy Gupta says:

The last paragraph simply states without explaining that treasury bonds affect conventional mortgage rates and bills affect short term debt. It is also left unexplained that if the expected yield on treasury notes are high, why would people buy *any* dollar denominated assets and not *only* t-notes.

August 15, 2011 at 9:13 pm
(4) useconomy says:

Mr. Gupta,

True, increases in longer-dated Treasury yields will make mortgage rates increase. See How Treasury Yields Affect Mortgages.

In answer to your other question, as Treasury yields rise, then sellers of other dollar-denominated assets will have to increase those returns to stimulate demand.

Kimberly

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