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few things in the economy are more
closely watched than bond yields there
are forces in play that merit watching
some commodity prices and 10-year
treasury yields have climbed that's the
president of the federal reserve of
atlanta last march speaking about how
the fed gauges inflation and why it's
keeping a close eye on certain bond
yields
u.s government bond yields are a
barometer for the economy but they're
also more than that
u.s government bond yields are extremely
important to the u.s and even the global
economy bond yields affect everything
from
the cost of a mortgage to the cost of
borrowing for businesses if you're
borrowing money that's going to be
determined to a large extent by us
government bond yields
and changes in yields can impact you
here's how bond yields work and why
they're so crucial to the economy
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when we talk about a bond yield we're
typically talking about the annualized
return an investor earns by holding a
bond until its maturity date
let's break this down
a bond is a contract with features that
are set from the start there's the
maturity date which refers to the length
of the bond's life this is generally 2
to 30 years bonds that mature between 2
and 10 years are also called notes
then there's this face value which is
the amount the bond is worth when it's
first created and the amount it is
guaranteed to pay on the maturity date
there's also the annual interest rate
otherwise known as the coupon rate this
is the fixed amount a bond pays each
year up to its maturity date so say an
investor buys a new 10-year treasury
note with a face value of one thousand
dollars and a coupon or yield of four
percent
every year the investor will receive
forty dollars and on the tenth year
she'll get back the original one
thousand dollars she paid for the bond
but here's the thing as soon as she buys
that bond she can sell it to other
investors
and when she does certain features of
the bond are subject to change
if the economy is doing well interest
rates may go up which means new bonds
will be issued at a higher yield
bringing down the value of existing
bonds
say a new batch of 10-year treasuries
pay a yield of 5
suddenly this bond is less attractive to
investors and the price has dropped when
the price goes down the yield goes up
and when interest rates go down this
same dynamic happens in reverse the
inverse relationship between the price
of a bond and its yield is key to
understanding why investors care so much
about bond yields and why you sometimes
see yields and stocks both going up at
the same time
investors generally like bonds because
they are a safe investment the problem
is that that return is going to be often
lower much lower than stocks sam
goldfarb covers changes in bond yields
and how they're connected to financial
markets and the economy if investors are
confident about the economy they might
not be satisfied with the small return
they can get from us government bonds
they might choose to buy stocks instead
but climbing treasury yields also signal
that borrowing is getting more expensive
it's basically a proxy for longer term
interest rates if you want to get a
rough sense of you know
where your mortgage rates are going to
be going you might look at the 10-year
treasury note and its yields bond yields
aren't just watched by economists and
investors the federal reserve keeps a
close eye on them as well
and they're not just watching bond
yields are a key part of monetary policy
that the fed uses to help influence the
economy there's been an underlying
sense of an improved economic outlook
and that that has to be part of why
rates would move back up from the
extraordinarily low levels they were at
that's the chairman of the federal
reserve in march 2021 talking about the
rise in bond yields during the economic
crisis
in 2020 the fed had slashed short-term
interest rates at controls to zero in an
effort to bolster the economy and
encourage spending and bond yields which
are heavily influenced by the outlook of
short-term interest rates also fell to
record lows
two years later much of the economy has
rebounded the economy has rapidly gained
strength despite the ongoing pandemic
giving rise to persistent supply and
demand imbalances in bottlenecks and to
elevated inflation
last december inflation rose seven
percent from a year earlier the fastest
pace since 1982 this reflected rapidly
rising prices on everything from houses
to groceries
and when the fed wants to restrain an
overheated economy it raises short-term
interest rates and when interest rates
rise bond yields go up as well
if inflation is uncomfortably high
people don't like that the fed has a
goal of keeping prices stable and so
it'll try to cool the economy by uh by
raising borrowing costs
higher interest rates can send up the
price of mortgages and other loans which
will likely slow down consumer spending
this sounds like a bad thing but only to
a point higher bond yields can help cool
down the economy which should bring down
inflation in the long term