Investors monitor Treasury bond yields (or rates) for a variety of reasons. The yields are paid by the US government as interest for borrowing money through the sale of bonds. But what does this mean, and where can you find yield data?
Treasury Bills are federal government loans with maturities ranging from a few days to 52 weeks.
Treasury Note has a maturity period of two to ten years, but a Treasury Bond has a maturity period of twenty or thirty years.
The 10-year Treasury yield is closely monitored as a measure of overall investor confidence. Treasury bills, notes, and bonds are considered one of the safest investments because they are fully backed by the United States government.
What Is the Importance of the 10-Year Treasury Yield?
The significance of the 10-year Treasury bond yield extends beyond simply knowing the security’s return on investment. Many other key financial problems, including mortgage rates, are proxied by the 10-year.
This bond is also a good indicator of investor confidence. The US Treasury sells bonds at auction, with yields determined by a bidding procedure. 5 When confidence is high, 10-year bond prices fall and yields climb. This is because investors believe they can find higher-returning investments elsewhere and do not believe they need to be conservative.
However, when confidence is low, bond prices rise and rates fall because there is increased demand for this safe investment. This sense of assurance extends beyond the borders of the United States. Because the United States is regarded as a safe haven for money, the geopolitical conditions of other nations can have an impact on government bond prices in the United States. As demand rises, the price of US government bonds may rise, lowering yields.
The time to maturity is another element that affects yield. The longer the maturity date of a Treasury bond, the higher the rates (or yields), because investors expect to be paid more the longer their money is locked up. Short-term debt often pays lower returns than long-term debt, forming what is known as a normal yield curve.
What effect do bonds have on stock markets?
When valuing equities, investors compute the expected rate of return by adding the equity risk premium they seek to a risk-free rate. Defaulting to the long government bond yield is usually the simplest way to estimate the risk-free rate. This is why long bond yields are important for equities.
Given that the long bond yield is the risk-free rate, a higher bond yield is negative for stocks and vice versa. However, it is important to recognise why bond rates are changing, not just the direction of change.
“Long bond yields reflect the economy’s growth and inflation mix.” Bond yields typically rise when growth is robust. They also rise in response to rising inflation. “The impact of these two conditions differs for stocks,” writes Ridham Desai, equity strategist at Morgan Stanley, in a note co-authored with Sheela Rathi and Nayant Parekh.
When growth is strong, the positive impact of faster growth in cash flows or, more accurately, dividends more than outweighs the negative impact of rising yields, causing equities share prices to rise.
“The difference between real GDP growth and the 10-year bond yield corresponds well with share prices, supporting the previous point.” Indeed, if GDP increases faster than bond yields in the coming months, share prices should be fine,” says Desai, adding that Indian equities/bond values are at the upper end of their 2010-21 ranges.
“If growth accelerates from here, as we think,” he argues, “equities are likely to break this range on the upside, consistent with the fundamental relationship.”