Yields on U.S. Treasury bonds fell to historic lows in March 2020 and remain low as the Federal Reserve and markets respond to the economically devastating pandemic. These low bond yields can help boost a recovery in several ways.
Treasury bonds are basically loans to the U.S. government, to be paid back to the investor along with the stated rate of annual interest at the end of a 10-, 20- or 30-year or other designated term. Since March, rates have been so low that the government can borrow from investors in the U.S. and overseas for next to nothing. In fact, after inflation, some bond rates are negative.
This makes it more palatable for the government to stimulate the economy through vigorous federal spending on infrastructure, or, in the case of the pandemic, programs that support businesses, the unemployed, and those struggling to pay their rent or mortgage. Congress can borrow freely without worrying too much about running up debt.
Businesses and consumers benefit too, because when Treasury bond yields drop, so do other interest rates. That means it’s cheaper for companies to borrow money to grow their business or keep it afloat. It’s easier for consumers to finance a home or a car and buy goods on credit, supporting companies. And with rates at rock bottom, saving is less attractive. Lower rates lead to less saving, greater money supply, more spending and more economic activity overall.
So, what drives Treasury yields down? Supply and demand. When markets are rocky and times are tough, bonds backed by the U.S. government have long been seen as the safest bet, for both domestic and foreign investors. With high demand, the government doesn’t have to offer high interest rates to attract buyers. Demand drives up the price of the bonds or coupon, which means the yield or payoff from the bond falls.
Conversely, in a hot stock market, investors go after higher returns and demand for long-term Treasury bonds drops, driving up yields. This is why bond prices and yields always move in opposite directions.
Treasury yields and interest rates on other bonds and investments, however, move together, closely linked. This is because investors are always seeking the best return, and if Treasury rates rise, other bonds boost their rates to attract investors.
Mortgage rates especially follow long-term Treasury bonds closely, because bond investors’ yields are constantly comparing returns available in the secondary market, and competition pushes the rates to converge.
Given their economy-boosting power, the Federal Reserve buys Treasury bonds itself to increase demand, push prices up and rates down. In March, as the economy began to show serious impact from shutdowns to stop the coronavirus, the Fed announced that it would buy at least $700 billion worth of Treasury bonds and agency-backed mortgages.
Treasury bonds play one other useful role in a faltering economy: they serve as a barometer of investor uncertainty. When investors are confident, demand for the 10-year bond drops and yields rise as investors are willing to chase higher returns with riskier investments. When investors are worried, they are more willing to park their money safely in bonds for 10 years for returns not much higher than they would earn at their local bank.
Today’s rock-bottom rates are helping us out of the slump, but also signaling low confidence.
—Toni L. Shears
Heather Long, “The 10-year U.S. Treasury yield hit an all-time low. Here’s why that’s worrisome,” The Washington Post, March 3, 2020, https://www.washingtonpost.com/business/2020/03/03/treasuries-record-low/.
Kimberly Amadeo, “How US Treasury Yields Affect the Economy,” The Balance, Aug. 21, 2020, https://www.thebalance.com/treasury-yields-3305741.
Kristina Zucchi, “Why the 10-Year Treasury Rates Matter,” Investopedia, Sept. 10, 2019, https://www.investopedia.com/articles/investing/100814/why-10-year-us-treasury-rates-matter.asp.
Eric Petroff, “The Fed’s Tools for Influencing the Economy,” Investopedia, March 17, 2020, https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp
Brad W. Setser, “How is the Fed Dealing with the Coronavirus Crisis?” Council on Foreign Relations,
March 20, 2020 https://www.cfr.org/in-brief/how-fed-dealing-coronavirus-crisis.
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