Bond Yield, 10 Year Treasury Bonds


Current Status and Perspectives

January 2007
10 Year Treasury Bond Yield for January 2007:
10 Year Treasury Bond Yield, Annual % Change for January 2007
(relative to January 2006):
Review the latest 10 Year Treasury Bond Yield data (Available at Economagic)

The following perspective is excerpted from a speech given by Federal Reserve Governor Randall S. Kroszner at the Institute of International Bankers In New York City on June 15, 2006. In it he discusses the perplexing question of why bond yields have not responded as expected to higher short term interest rates:

“In February 2005, former Federal Reserve Board Chairman Alan Greenspan noted a puzzle in the U.S. economy related to the slope of the yield curve and the level of the long-term interest rate. Long-term interest rates had remained low and stable despite a solid economic recovery and a sustained period of monetary policy tightening during which the target federal funds rate went from 1 percent to 2-1/2 percent. When he first publicly noted this "conundrum," as he called it, the ten-year Treasury yield was just over 4 percent. Today, despite an additional 250 basis points of increase in the target federal funds rate, the nominal ten-year Treasury yield is roughly 5 percent, still very low by historical standards, compared to an average of more than 7-1/2 percent since 1980.

“The combination of a rising short rate and a relatively stable long rate has led to a very flat yield curve. During the last quarter-century, for example, the difference between the yield on the ten-year Treasury note and the yield on the three-month Treasury bill has been roughly 1-3/4 percent (or, to be exact, 179 basis points from 1980 to the present). During the last year, that difference has been less than 50 basis points and is currently less than half of that. Thus, this essentially flat slope is atypical in U.S. experience.

“I am sure that you are all familiar with the simple relationship between short-term and long-term interest rates. The yield on a ten-year bond, for instance, can be thought of as a series of consecutive forward rates. If you could borrow and lend at the same rate as the U.S. Treasury, then you could lock in a three-month loan ten years from now by borrowing for ten years and three months and simultaneously lending the same principal for ten years. The difference between the interest you pay and the interest you earn on this transaction determines the implied forward rate ten years from today. The forward rate reflects not only the market expectation of the future short-term interest rate but also a "term premium" to compensate for the risk in committing to extend credit so far in the future, including the risk of future inflation.

“At any point in time, then, we can calculate the short-term forward rate ten years ahead based on the yield curve of U.S. Treasury coupon securities. This "far forward" rate makes the conundrum even more puzzling because it reached historically low levels of almost 4-1/4 percent last year, more than 200 basis points below its average since 1990, and has rebounded only somewhat this year. In real terms, the far forward rate calculated from inflation-indexed securities is similarly below its long run average.”

The following perspective is excerpted from a speech by William Poole (President, Federal Reserve Bank of St. Louis) at the Global Interdependence Center, Central Bank Series, Federal Reserve Bank of Philadelphia, May 18, 2006. In it he talks about trends in long-term interest rates:

“Market commentary has attributed much of the recent increase in long rates [i.e., the yield on long-term treasury bonds] to a restoration of a more-normal term premium for holding long-term debt. But policymakers should not view the term premium as a single component of long-term interest rates. Instead, the term premium consists of compensation for the risk that real interest rates will turn out to be higher than expected in the future and separate compensation for the risk that inflation will turn out to be higher than currently expected. Naturally, if the term premium increases because of changes in bearing real interest-rate risk, as a policymaker I am more comfortable with that than if the term premium increases because of market concerns about the risk of inflation. Yields on Treasury inflation-indexed securities, combined with factor models of the term structure of interest rates, suggest that the compensation for bearing real interest-risk dropped between June 2004 and late 2005, although it has rebounded somewhat since then. Because some of these factor models suggested that the term premium had dipped nearly to zero by late 2005, some rebound was likely.

“Among the international factors cited as influences on U.S. interest rates in the past few years is the global saving glut. Unusually high saving might hold down the level of real interest rates, but there is no reason why there should be an effect on the shape of the term structure. In any event, it appears that real interest rates are returning to a more normal level in the United States. The 10-year indexed bond had a rate of about 1.6 percent in the fall of 2004; that rate is now up to about 2.4 percent.”

The following is excerpted from the U.S. Treasury’s Bureau of the Public Debt FAQ page. It details the various debt instruments that the government uses to finance its activities.

What are Treasury bills, notes, bonds, and TIPS?

Treasury bills, notes, bonds, and TIPS are marketable securities the U.S. government sells in order to pay off maturing debt and raise the cash needed to run the federal government. When you buy one of these securities, you are lending your money to the U.S. government.

What distinguishes bills, notes, bonds, and TIPS from one another?

Treasury bills are issued in terms of one year or less. Treasury bills are sold at a discount from face value and don't pay interest before maturity. The interest is the difference between the purchase price of the bill and the amount that is paid to you either at maturity (this amount is the face value) or when you sell the bill prior to maturity.

Treasury notes and bonds bear a stated interest rate, and the owner receives semi-annual interest payments. Treasury notes have a term of more than one year, but not more than 10 years. Treasury bonds have terms of more than 10 years.

TIPS, or Treasury Inflation-Protected Securities, are securities whose principal is tied to the Consumer Price Index. With inflation, the principal increases. With deflation, it decreases. Interest is paid every six months, based on a fixed rate applied to the adjusted principal. At maturity, we pay the original or adjusted principal, whichever is greater. TIPS are sold in terms of 5, 10, and 20 years.

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