Treasury notes are issued in terms of 2, 3, 5, and 10 years, while Treasury bonds are issued in terms of 30 years. Treasury bills are issued in terms of one year or less. However, many people just refer to all of them as Treasury bonds, Treasury products or even just Treasuries. The most popular Treasury product is the 10 year note.
On the other hand, the high level of the U.S. debt has started to worry investors, and they begin to purchase less Treasury note and bonds, even at higher interest rates. If this were to happen, it would have a negative effect on the U.S. economy.
Conversely, higher note and bond yields mean higher mortgage interest rates, which means you have to buy a smaller, less expensive home. This slows down the economy.
For example, on January 3, 2002, the yield curve was:
- 1.73% for the 3-month Treasury bill,
- 2.24% for the 1-year Treasury note,
- 4.48% for the 5-year Treasury note,
- 5.16% for the 10-year Treasury note, and
- 5.54% for the 30-year Treasury bond.
However, in January 2006, the yield curve started to flatten. This means that investors did not require a higher yield for longer term notes. On January 3, 2006 the yield on the10-year note was 4.37%, virtually the same as the yield of 4.38% on the 1-year note. When this happens, it is known as an inverted yield curve. This can often forecast a recession, as it did in April 2000. That’s because investors believe that the economy is going into a slump in the next year or so, and they would rather keep the longer 10-year note than buy and sell the shorter 1-year note, which may do worse next year when the note is up.
Treasury Note and Bond Yields Outlook:
Most economists agree that Treasury bond yields will gradually increase over the next 20 years. Treasury yields are low because foreign investors, notably Japan, China and oil-producing countries, need dollars to keep their economies functioning. The best way to collect dollars is by buying Treasury bonds. The popularity of Treasury bonds have kept yields below 6% for the last five years.However, several factors will make Treasury bonds less popular over the next 20 years.
- The U.S. is running an almost $1 trillion current account deficit. Furthermore, government sources predict a $11 trillion U.S. debt by 2011. Foreign investors may wonder if the U.S. will be able to repay them.
- One way the U.S. can reduce its debt is by letting the value of the dollar decline. When the foreign governments demand repayment of the face value of the Treasury bond, it will be worth less in their own currency, since the dollar's value will be less.
- The factors that caused China, Japan and oil-producing countries to buy Treasury bonds are changing. As their economies become stronger, they will use their current account surpluses to invest in their own countries infrastructure. They will no longer need the safety of U.S. Treasuries, and will start to diversify away.
- Finally, part of the attraction of U.S. Treasuries is that they are denominated in dollars, which have become a global currency. All oil must be sold in dollars. Most global financial transactions are done in dollars. As other currencies, such as the euro, become more popular, more transactions will be done in euros, lessening the value of the dollar, and of U.S. Treasuries.
