What Treasury Note and Bond Yields Measure:
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.
How Treasury Note and Bond Yields Affect the U.S. Economy:
On the other hand, the high level of the U.S. debt is worries investors, especially China. They threaten to purchase less Treasury note and bonds, even at higher interest rates. As this happens, it indicates a loss of confidence in the strength of the U.S. economy. This drives down the value of the dollar.
How Treasury Note and Bond Yields Affect You:
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.
Recent Treasury Note and Bond Yields Trends:
For example, on August 12, 2009, the yield curve was:
- .17 for the 3-month Treasury bill,
- .47 for the 1-year Treasury note,
- 2.70 for the 5-year Treasury note,
- 3.72 for the 10-year Treasury note, and
- 4.53 for the 30-year Treasury bond.
Treasury Yields Predicted This Recession:
In January 2006, the yield curve started to flatten. This meant that investors did not require a higher yield for longer term notes. On January 3, 2006 the yield on the 10-year note was 4.37%, virtually the same as the yield of 4.38% on the 1-year note. This is known as an inverted yield curve. It predicted the current recession. In April 2000, an inverted yield curve predicted the 2001 recession. When investors believe the economy is slumping, 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 China, Japan 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 a $11.6 trillion U.S. debt and a $700 billion current account deficit. Foreign investors wonder if the U.S. will repay them.
- 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, 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 are using their current account surpluses to invest in their own countries' infrastructure. They no longer need 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. 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.
