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Saturday, January 18, 2014
 
[Finance] US Treasury Bond Yields

Bond prices and bond yields are inversely related — rising bond prices means lower yields, and falling bond prices imply higher yields.

When sold initially at auction by the US Treasury department, treasury notes or bonds will have a fixed face value and fixed interest rate. In the context of treasury bonds, the interest rate is usually referred as coupon rate, coupon percent rate or simply coupon.

Similar to stocks, bonds are resold on the open market or secondary market. Demand for those treasury bonds may push the price higher and the yield lower. The reason for the lower yield being upon maturity, treasury pays back just the face value along with the pre-determined interest rate. The current yield for any treasury bond can can be calculated as shown below.


                   Actual Annual Interest
   Current yield = ---------------------- * 100
                    Current Market Value

For example, if a treasury bond with a face value of $100 and an interest rate 3% was sold at a premium price for $101 due to demand, the current yield will be (3/101) * 100 = 2.97%

Implication of Treasury Yields:

Listed below are some high-level implications of the rising or falling treasury yields.

Rise in treasury yields may:

Drop in treasury yields usually will have inverse effect of the rise in treasury yields. For example, drop in treasury yields may lead to decreased interest rates, which in turn may encourage borrowing and the resulting cash flow can result in real estate boom on the positive side, and can cause the inflation to go up on the negative side. Inflation is the rise in the prices of goods and services over time. Rise in interest rates in a inflation ridden nation may make things worse.

Note that the impact can be felt when there is a sudden and noticeable movement in yields in either direction. Once stabilized, people may get used to the new normal, and some of the things may go back to the way there were. For example, sudden upward surge in treasury yields may drive investors away from Gold - but once the knee-jerk reaction subsides, investors may return and continue trading Gold. After all, Gold is a precious metal with lots of demand worldwide.

Source: various including Investopedia

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