The yields on U.S. Treasury instruments, notably 10-year Treasury bonds, are considered to be an important measuring stick for market confidence and investor appetites. This is because government bonds carry almost zero risk to principle, so all other security investments are forced to add a risk premium to entice savers. When the yield on Treasury bonds moves, all other investments tend to move in kind.

Understanding Treasury Yields

As a debt instrument, a Treasury bond's yield has an inverse relationship with its price. When there is greater demand for bonds, the price is bid up and the return -- based on the coupon rate for Treasury bonds -- is relatively lower compared to the higher price.

Investors are most likely to demand low-risk Treasury bonds when times are uncertain. This is because they are protected against absolute market loss. This causes yields to drop, which is traditionally a sign of economic weakness, and it tends to lower the return that other security issuers offer.

Risk-Free Treasuries

Like all bonds, Treasury bonds promise the return of investor principle upon maturity. This guarantee is only as good as the creditworthiness of the issuer. Since the U.S. Treasury Department has a de facto printing press in the Federal Reserve, there is almost zero chance that the government will default on its debt obligations.

Treasury Bond Yields and Interest Rates

The interest rate offerings for all deposit accounts, loans and investments compete with the yield offered on Treasuries. To see how this works, consider a scenario where you have $10,000 to save. The present yield on a Treasury bond is 5% and the interest rate offered on a similar duration corporate bond (or CD, or expected return on an equity, etc.) is also 5%.

In this scenario, you should always choose the Treasury bond because it's safer. Other issuers know this, so they increase their return (or expected return) as a premium on the additional risk that investors have to assume to make a purchase.

  1. What is the difference between the Daily Treasury Long-Term Rates and the Daily Treasury ...

    Find out more about the daily Treasury long-term rates, daily Treasury yield curve rates and the difference between these ... Read Answer >>
  2. What forms of debt security are available for the average investor?

    Discover the various different types of debt securities, issued by government entities or corporations, that are available ... Read Answer >>
  3. What are some classes I can take to prepare for the Series 6 exam?

    Learn about how the risk-return tradeoff applies to bond yields, and the different types of risks associated with investing ... Read Answer >>
  4. What are the differences between a treasury bond and a treasury note and a treasury ...

    Understand the types of securities the government issues and learn the difference between Treasury notes, Treasury bonds ... Read Answer >>
Related Articles
  1. Investing

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
  2. Investing

    How Bond Market Pricing Works

    Learn the basic rules that govern how bond prices are determined.
  3. Investing

    IEI: iShares 3-7 Year Treasury Bond ETF

    Take a closer look at the iShares 3-7 Year Treasury Bond ETF, which is a BlackRock issue focused on intermediate maturity government bonds.
  4. Investing

    Government Bond ETFs: Pros and Cons

    A look at the pros and cons of government bond ETFs.
  5. Investing

    Government Bond ETFs to Date 2016 Performance Review (ZROZ, EDV)

    Find out how government bond exchange-traded funds (ETFs) are performing YTD in 2016, and which are the best and worst performers.
  6. Investing

    TLT: iShares Barclays 20+ Year Treasury Bond ETF

    Learn about the iShares 20+ Year Treasury Bond ETF (TLT). TLT is a very liquid ETF with low costs that allow investors to gain exposure to treasuries.
  7. Investing

    5 Government Bond ETFs Popular in 2016 (SHY, IEF)

    Discover how the five most popular government bond ETFs can provide access to Treasuries with short-, intermediate- and long-term exposure.
  8. Investing

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  9. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, ...
  2. 30-Year Treasury

    The 30-Year Treasury is a U.S. Treasury debt obligation that ...
  3. Long Bond

    The 30-year U.S. Treasury Bond. The long bond is so called because ...
  4. Thirty-Year Treasury

    A U.S. Treasury debt obligation that has a maturity of 30 years. ...
  5. U.S. Treasury

    Created in 1798, the U.S. Treasury is the government (Cabinet) ...
  6. Yield Spread

    A yield spread is the difference between yields on differing ...
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center