Bonds

Question 1

Treasury Bill - Definition

Define

“Treasury Bill”

Answer 1

A certificate representing a loan to the federal government that matures in three, six or 12 months

Question 2

Treasury Note - Definition

Define

“Treasury Note”

Answer 2

A Treasury note may mature in one to 10 years or more.

Question 3

Treasury Bond - Definition

Define

“Treasury Bond”

Answer 3

• A treasury bond is a certificate representing a loan to the federal government that matures in more than 10 years.
• Since they are backed by the U.S. government, they are seen as a safe investment, particularly relative to stocks and other securities.
• The 10-year yield is used as a proxy for mortgage rates, and other measures; it’s also seen as a sign of investor sentiment about the economy.

Question 4

Treasury Bond - Yield Fluctuations

What is the significance of a fluctuating

“Treasury Bond Yield”

Answer 4

• Treasury bond prices and yields move in opposite directions—falling prices boost yields and rising prices lower yields.
• When confidence is high, the 10-year bond’s price drops and yields go higher because investors feel they can find higher returning investments and do not feel they need to play it safe.
• But when confidence is low, the price goes up as there is more demand for this safe investment and yields fall.
• As Treasury yields rise, so do the interest rates on consumer and business loans with similar lengths.

Question 5

10-Year Treasury Indication

What does the 10-year treasury indicate?

Answer 5

• The 10-year Treasury is an economic indicator in that its yield tells investors more than the return on investment—while the historical yield range does not appear wide, any basis point movement is a signal to the market.
• While rates do not have a wide dispersion, any change is considered highly significant and large changes—of 100 basis points—over time can redefine the economic landscape.

Question 6

Effects of Treasury Yields

How does the treasury yield affect the consumer?

Answer 6

• The most direct manner in which Treasury yields affect you is their impact on fixed-rate mortgages.
• As yields rise, banks and other lenders realize that they can charge more interest for mortgages of similar duration.
• The 10-year Treasury yield affects 15-year mortgages, while the 30-year yield impacts 30-year mortgages.
• Higher interest rates make housing less affordable and depress the housing market.
• It means you have to buy a smaller, less expensive home. That can slow gross domestic product growth.