Treasury Bonds – aka U.S. savings bonds, typically mature in 20-30 years.
Treaury Notes – aka T-notes, mature anywhere between 2 and 10 years, with bi-annual interest payments.
Treasury Bills – aka T-bills, matury from 4 weeks to 1 year. Instead of paying interest, the T-bills will discount its price to investors, so that “interest” is earned at maturity when redemption is made at par value.
Federal Reserve System – aka Fed, the central banking system of the United States, designed for central control of the monetary system in order alleviate financial crises. The Fed has the ability to raise or lower interest rate through its FOMC meeting. It gets a target for banks to use for the fed funds rate.
Department of the Treasury – the national treasury of the federal government of the United States. It issues bonds, notes, and bills.
Coupon Rate vs Bond Yield Rate
Coupon rate is the rate of interst it pays annually based on the par value of the bond. a 20-year $1,000 bond with 2% coupon rate pays $20 of interest annually.
Yield is the rate of return. It can be the same as coupon rate if the market price of the bond is the same as the par value of the bond. a $1,000 bonds, as listed above, with 2% coupon rate may be traded at $900 in the secondary market. Therefore, the yield is $20 of interest divided by $900 of investment, which equals to the yield of 2.22%
As market price of the bond goes down, yield goes up. As market price of the bond goes up, yield goes down.
Fed vs Yields
The treasury bonds (including notes and bills) are issued by the Department of Treasury. Prior to 2008, the issurance of such debt vehicles are purchased by the investors. However, since the collapse of wallstreet and the finacial crisis, led by unregulated the subprime mortgage, treasury bonds have been purchased by the Fed. This action has been refered as quantitative easing. It increases both the assets and liability of the Fed but resumes confidence of the market economy.
As of now, 40% of the treasury bonds have been purchased by the Fed, while the other 60% were purchased by other investors. Those treasury bonds purchased by the Fed are the money, colloquially speaking, created and printed by the Fed. In 2020, more than 1/3 of the US Dollars are created and printed by the Fed. In the beginning of the 2020, US national debt was roughly 22 trillion, buy by now it has increased to 28 trillion. Of the additional 6 trillion, 2.4 trillion was being bought up by the Fed, while the rest is bid by the investors. While investors’ demand for treasury bonds stay stagnant, the sudden surge of supply force the price of bonds go down.
“As market price of the bond goes down, yield goes up.”
The reason of investor’s low demand for treasry bonds is because of the Tresusry’s additional 6 trillion debts throughout the past year.
High yield and opinions
- the yield on the 10 year goes up because the economy is recovering from the pandemic. The employment rate is currently sitting at 6%, far above the 3% that we want to achieve.
- inflation expectation is on the trend, and the Fed may need to raise rates to counter the raising price of goods. With high rates, the bonds market becomes a better investment and money will flow from the euqity market to the debt market. But is this the sole reason that yields go up? Inflation is actually caused by the Treasury issuing too much debts while the Fed did not keep up with the purchase. The Fed is not promising the 40% purchase of the new issurance of bonds.
The 1.9 Trillion Relife Bill
As mentioned in the above paragraph, the Fed has not promised to buy 40% of the new issurance of treasury bonds. In fact, the Fed has slowed down the purchase of such bonds in the second half of 2020, due to the fact that it has began to buy mortgage and corporate bonds. So why, for the purpose to stimulate economy, does the Fed not continuing with the treasury bond purchases? The US Dollars.
The US Dollars has been on the verge of collapsing. Buying more treasury bonds will save the market but destory the dollars, while buying less treasury bonds will save the dollars.
Benc Tan 