Further Reading:
How Do U.S. Treasury Instruments Affect Interest Rates?
The U.S. Treasury Department sells bills, notes, and bonds at auction to pay for the U.S. debt, setting the face value and interest rate.
Treasury notes are safer than any other bond because the U.S. government guarantees them from default. The modest return (i.e., the 10-year Treasury note traded under 1% for much of 2020) is offset by the extreme safety of the asset.
The U.S. Treasury issues notes in terms of two, three, five, and 10 years. Bonds are issued in terms of 30 years. Bills are issued in terms of one year or less. Treasury yields change every day because they are constantly being sold on the primary and secondary markets.
Do you know the term bills?
Treasury securities with terms of one year or less are called “bills.”
“Notes” are for securities with maturities of two to 10 years, and “bonds” are for 30 years.
How Does Demand for Treasuries Affects Interest Rates?
Anything (news or otherwise) that increases the demand for longer-term Treasury bonds puts downward pressure on interest rates.
If there is a lot of demand for Treasuries, the price will go (up) above the face value and the yield or total return on investment will decrease.
The opposite is true, in which case an investor would pay less to receive the stated interest rates, increasing yield.
What is the Relationship Between Price and Yield?
Price and yield always have an inverse relationship.
Put another way, when yields are low, demand is high and the government doesn’t have any trouble selling these bonds to investors.
When yields are high, demand is low and the government is looking to incentivize investors with higher interest rates.
