Treasury Yield

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Treasury Yield

What is a treasury yield?

Treasury yield is the annualized percentage return an investor receives for holding a U.S. government debt security (T-bills, T-notes, T-bonds). Yields reflect the interest the government pays to borrow and serve as a benchmark for other interest rates across the economy. Higher long-term yields generally signal stronger economic expectations or rising inflation expectations; lower long-term yields can indicate weaker growth prospects.

How yields are set

  • Treasuries are sold at auction and traded in secondary markets. Supply and demand determine price; yield moves inversely to price.
  • Coupon payments (periodic interest) and principal repaid at maturity determine total return for notes and bonds.
  • If a security’s market price rises above par, its effective yield falls; if the price falls below par, yield rises.
  • The U.S. Treasury publishes daily yields for all maturities.

Types of Treasury securities and how yields differ

  • T-bills (maturities up to 1 year): issued at a discount and pay no coupons. Return = difference between purchase price and face value.
  • T-notes (1–10 years): pay semiannual coupons and return face value at maturity.
  • T-bonds (20–30 years): similar to notes but longer maturity, typically higher yields to compensate for greater duration risk.

Yield on T-bills (discount vs. investment yield)

T-bills are quoted using two common yield measures:

Example: 90-day T-bill with FV = $10,000, P = $9,950
– Discount yield ≈ [(10,000 − 9,950) / 10,000] × (360 / 90) = 2.00%
– Investment yield ≈ [(10,000 − 9,950) / 9,950] × (365 / 90) ≈ 2.04%

Yield on notes and bonds (including yield to maturity)

For coupon-bearing Treasuries, yield reflects coupon income and any gain/loss at maturity. If purchased at:
– Par: yield = coupon rate.
– Discount: yield > coupon rate.
– Premium: yield < coupon rate.

A common approximation for yield to maturity (held to maturity) is:
Treasury Yield = [C + ((FV − PP) / T)] ÷ [(FV + PP) / 2]

where
– C = annual coupon payment
– FV = face value
– PP = purchase price
– T = years to maturity

Example: 10-year note, 3% coupon (annualized $300), FV $10,000, purchase price $10,300
– Yield ≈ [300 + ((10,000 − 10,300) / 10)] ÷ [(10,000 + 10,300) / 2] ≈ 2.66%

Yield curve and the Federal Reserve

  • The yield curve plots yields across maturities (short to long).
  • The Fed influences short-term rates via the federal funds rate; expectations of Fed moves strongly affect short-term Treasury yields.
  • Normally, longer maturities carry higher yields to compensate for greater duration and inflation risk.
  • An inverted yield curve (short-term yields > long-term yields) can signal investor expectations of slowing growth and has often preceded recessions, though not perfectly.

Payments, taxes, and custody

  • Interest and principal payments are made through TreasuryDirect or via brokerage accounts.
  • Treasury interest is subject to federal income tax but exempt from state and local income taxes.

Why investors buy Treasuries

  • Safety: backed by the U.S. government’s credit.
  • Liquidity: deep, active markets make buying and selling easy.
  • Diversification and a benchmark: Treasuries are used to price other debt and to manage portfolio risk, even though yields are typically lower than equities or corporate debt.

Key takeaways

  • Treasury yield = the annual return on U.S. government debt; it moves inversely to price.
  • Different maturities (bills, notes, bonds) have different yield behavior and risk profiles.
  • The Fed and investor expectations shape the yield curve; an inverted curve can signal recession risks.
  • T-bill yields can be quoted two ways (discount vs. investment); notes and bonds’ yields depend on coupon, price, and time to maturity.
  • Treasuries offer lower returns but high safety, liquidity, and favorable tax treatment at the state level.