What Are Treasury Yields?:
How Do Treasury Yields Work?:
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 bond prices.
How Treasury Yields Affect the Economy:
As investors bid up yields on Treasuries in the secondary market, it also mean that the Treasury Department itself will be forced to pay a higher interest rate to attract buyers in future auctions. Over time, these higher rates can start to increase demand for Treasury products. That's why higher Treasury yields can increase the value of the dollar.
How Treasury Yields Affect You:
However, if the yields on long-term Treasuries are low compared to short-term notes, then investors are uncertain about the economy, and are willing to leave their money tied up just to keep it safe. When long-term yields drop below short-term yields, you have an inverted yield curve. That usually predicts a recession.
For example, here's the yield curve for September 5, 2013:
- .02 for the 3-month Treasury bill,
- .16 for the 1-year Treasury note,
- 2.98 for the 10-year Treasury note, and
- 3.88 for the 30-year Treasury bond.
Treasury Yield Outlook:
In August 2013, the yield on the benchmark 10-year Treasury note rose to 2.88%. This drove mortgage interest rates to 4.57% for a 30-year fixed-interest loan. This was just two months after the Treasury yield hit 2.6%, which was itself a point higher than the year before. For more, see Why Wall Street Carnage Means Mortgage Rates Will Rise.
Over the next year, rates will probably rise even further. Analysts at Citi forecast that the 10-year Treasury yield will hit 3.1% by the middle of 2014. Wells Capital Management predicts it could happen by the end of 2013. However, these are still historically low rates. (Source: CNBC, Market Consensus: Get Ready for 3% Treasury Yields, June 19,2013)
In the medium-term, there are ongoing pressures that keep Treasury yields relatively low. Foreign investors, notably China, Japan and oil-producing countries, need dollars to keep their economies functioning. The best way to collect dollars is by buying Treasury products. The popularity of Treasuries have kept yields below 6% for the last five years.
In the long-term, several factors will make Treasury products less popular over the next 20 years.
- The huge U.S. debt worries foreign investors, who wonder if the U.S. will repay them. It especially worries China, the largest foreign holder. China often threatens to purchase less Treasuries, even at higher interest rates. If this happens, it would indicate a loss of confidence in the strength of the U.S. economy. This would ultimately drive down the value of the dollar.
- One way the U.S. can reduce its debt is by letting the value of the dollar decline. When foreign governments demand repayment of the face value of the Treasury bond, it will be worth less in their own currency if the dollar's value is lower.
- The factors that caused China, Japan and oil-producing countries to buy Treasury bonds are changing. As their economies become stronger, they are using their current account surpluses to invest in their own country's infrastructure. They aren't as reliant upon the safety of U.S. Treasuries, and are starting to diversify away.
- Finally, part of the attraction of U.S. Treasuries is that they are denominated in dollars, which are in effect a single global currency. Most oil contracts must be denominated in dollars. Most global financial transactions are done in dollars. As other currencies, such as the euro, become more popular, less transactions will be done in the dollar, lessening its value, and that of U.S. Treasuries.
The Yield Hit 200-year Lows in 2012:
Yields were abnormally low due to continued economic uncertainty. Investors accepted these low returns just to keep their money safe. They were concerned about the eurozone debt crisis, the fiscal cliff, and the outcome of the 2012 Presidential election. (Source: U.S. Treasury Department, Daily Treasury Yield Curve Rate)
Treasury Yields Predicted The 2008 Financial Crisis:
Most people ignored the inverted yield curve because the yields on the long-term notes were still low -- less than 5%. This meant that mortgage interest rates were still historically low, indicating plenty of liquidity in the economy to finance housing, investment and new businesses. Short-term rates were higher, thanks to Federal Reserve rate hikes. This mostly impacts adjustable rate mortgages. Long-term Treasury note yields stayed at around 4.5%, keeping fixed-rate mortgage interest rates stable at around 6.5%. (Updated August 20, 2013)