Treasury yield is the effective annual interest rate that the U.S. government pays on one of its debt obligations, expressed as a percentage. Think of Treasury yield as the annual return investors can expect from holding a U.S. government security with a given maturity. Treasury yields affect not just government borrowing costs and investor earnings but also influence consumer and business loan interest rates, economic outlook, and inflation expectations.
Key Takeaways
- Treasury yields represent interest rates the U.S. government pays to borrow money for varying periods.
- They are inversely related to Treasury prices and affect fixed-income securities prices and trade.
- Different maturities of Treasury securities each have distinct yields; longer-term securities generally have higher yields.
- High long-term Treasury yields often signal a positive economic outlook and higher inflation expectations.
Understanding Treasury Yields
When the U.S. government decides to borrow funds, it issues debt instruments through the U.S. Treasury. Treasury bonds (T-bonds) refer specifically to U.S. government bonds with maturities of 20 to 30 years, while Treasury notes cover maturities from one to 10 years, and Treasury bills (T-bills) are those maturing within a year. Treasury yields are inversely related to Treasury prices, creating distinct yields for different maturities, allowing the U.S. Treasury to publish daily yield figures.
How Treasury Yields Are Determined
Considered as low-risk investments, Treasuries are backed by the full faith and credit of the U.S. government. Investors purchase these Treasuries, effectively lending money to the government, which in turn pays interest (coupons). Supply and demand, interest rates, and market expectations collectively determine the rate of return or yield. For example, if a 10-year T-note of $1,000 yields 3% but falls to $974.80 in market value, the new yield rises to 3.3% while retaining $30 in annual coupon payments.
Treasury Yield Curve and the Fed
Treasury yields can rise, pushing bond prices lower, if the Federal Reserve increases the federal funds rate or if there’s an anticipation of such a hike. Different Treasury maturities react uniquely, where shorter-term rates are more sensitive to federal funds rates, influencing short-term yields to possibly rise faster than long-term yields during such policy revisions. There’s often a natural increment in yields tied to longer durations. Nonetheless, in an impending recession, the yield curve may invert, suggesting lower yields for long-term Treasuries relative to short-term ones.
Yield on Treasury Bills
Contrary to notes and bonds, T-bills resemble zero-coupon bonds—no interest payments but policy-induced face-value discounts. Investors bid for T-bills below par, subsequently redeeming them at face value upon maturity, exploiting differences to calculate yields. The Treasury Department utilizes the discount and investment yield methods to measure T-bill returns, distinguishing the returns from purchase prices or face value, respectively.
To illustrate:
- Discount Yield: Purchasing $10,000 face-value T-bills at $9,950: 2%
- Investment Yield: Same purchase: 2.04%
Noticing the standard 360 vs. 365 days for numerations marks practical adaptive calculations.
Yield on Treasury Notes and Bonds
For Treasury notes or bonds, yields derive from semi-annual coupon payments and final face value repayments at maturity. Purchase price deviations (premium or discount) gear the final yield to either surpass, equalize or undercut the coupon rate. Yield evaluates holistically encompassing coupon rate, face values, and market prices:
Example Yield Calculation:
10-year note @ 3% coupon, $10,300 premium growth: 2.66%.
How Are Treasury Yields Paid?
Holding Treasuries allows interest payments via your TreasuryDirect.gov account. For brokerage accounts, payments credit to those accounts.
Why Buy Treasuries?
Despite lower returns versus other securities like stocks, Treasuries attract stability-seeking and liquidation-ready investors. Lower risk inherently births conservative-yield interest investments.
Do You Pay Taxes on Treasury Yields?
Federal taxes apply to interest garnered from Treasuries but state taxes do not. On comparison, municipal bonds typically remain tax-exempt unless stated otherwise.
The Bottom Line
Treasury securities symbolically substantiate yield via inverted pricing proportions. Given their restricted risk spectrum under maturity assurance, they hold comparatively lower returns to alternative investments; other yields across the finance sphere often infer premiums above correlated Treasury yields corresponding to identical maturities, justifying additional non-sovereign credit security risks.
Longer contractor terms equating higher yield encouragement cater to participatoryvigilance against duration risk adhering to economic pessimism warned inversions pertaining economic cool-off anticipation.
Related Terms: Government Securities, Fixed-Income Securities, U.S. Treasury, Yield Curve, Inflation Expectations, Federal Reserve.
References
- Federal Reserve Bank of Chicago. “Why Does the Yield-Curve Slope Predict Recessions?”
- Federal Reserve Bank of Boston. “Predicting Recessions Using the Yield Curve: The Role of the Stance of Monetary Policy”.
- U.S. Department of the Treasury. “Daily Treasury Bill Rates”.
- TreasuryDirect. “Price, Rate, and Yield Calculations for a Treasury Bill”.
