Full transcript
0:00- [Presenter] Few things in the economy
0:02are more closely watched than bond yields.
0:05- There are forces in play that merit watching.
0:08Some commodity prices
0:09and 10-year treasury yields have climbed.
0:11- [Presenter] That's the president of
0:12The Federal Reserve of Atlanta last March
0:15speaking about how The Fed gauges inflation
0:18and why it's keeping a close eye on certain bond yields.
0:22US government bond yields are a barometer for the economy,
0:25but they're also more than that.
0:27- US government bond yields are extremely important
0:30to the US and even in the global economy.
0:32Bond yields affect everything from the cost of a mortgage
0:37to the cost of borrowing for businesses.
0:39If you're borrowing money,
0:41that's gonna be determined to a large extent
0:43by US government bond yields.
0:46- [Presenter] And changes in yields can impact you.
0:48Here's how bond yields work
0:50and why they're so crucial to the economy.
0:52(bright music)
0:57When we talk about a bond yield,
0:58we're typically talking about the annualized return
1:01an investor earns by holding a bond until its maturity date.
1:05Let's break this down.
1:06A bond is a contract with features that are set
1:09from the start.
1:10There's the maturity date,
1:11which refers to the length of the bond's life.
1:13This is generally two to 30 years.
1:16Bonds that mature between two and 10 years
1:18are also called notes.
1:20Then there's it's face value, which is the amount
1:23the bond is worth when it's first created
1:25and the amount it is guaranteed to pay on the maturity date.
1:28There's also the annual interest rate,
1:30otherwise known as the coupon rate.
1:32This is the fixed amount a bond pays each year
1:35up to its maturity date.
1:36So say an investor buys a new 10-year treasury note
1:40with a face value of $1,000 and a coupon or yield of 4%.
1:45Every year, the investor will receive $40
1:49and on the 10th year, she'll get back the original $1,000
1:52she paid for the bond.
1:54But here's the thing, as soon as she buys that bond,
1:57she can sell it to other investors
1:59and when she does certain features of the bond
2:02are subject to change.
2:04If the economy is doing well, interest rates may go up,
2:07which means new bonds will be issued at a higher yield,
2:10bringing down the value of existing bonds.
2:13Say a new batch of 10 year treasuries pay a yield of 5%.
2:17Suddenly this bond is less attractive to investors
2:21and the price has dropped.
2:22When the price goes down, the yield goes up
2:25and when interest rates go down,
2:26this same dynamic happens in reverse.
2:29The inverse relationship between the price of a bond
2:32and it's yield is key to understanding
2:34why investors care so much about bond yields
2:37and why you sometimes see yields and stocks
2:40both going up at the same time.
2:42- Investors generally like bonds
2:44because they are a safe investment.
2:46The problem is that that return is gonna be often lower,
2:49much lower than stocks.
2:51- [Presenter] Sam Goldfarb covers changes in bond yields
2:53and how they're connected to financial markets
2:55and the economy.
2:57- If investors are confident about the economy,
2:59they might not be satisfied with the small return
3:02they can get from US government bonds.
3:04They might choose to buy stocks instead.
3:06- [Presenter] But climbing treasury yields also signal
3:09that borrowing is getting more expensive.
3:11- It's basically a proxy for longer-term interest rates.
3:15If you want to get a rough sense of, you know,
3:18where your mortgage rates are gonna be going,
3:20you might look at the 10-year treasury note and it's yield.
3:23- [Presenter] Bond yields aren't just watched
3:24by economists and investors.
3:26The Federal reserve keeps a close eye on them as well.
3:29And they're not just watching.
3:31Bond yields are a key part of monetary policy
3:34that The Fed uses to help influence the economy.
3:37- There has been an underlying sense
3:39of an improved economic outlook, and that has to be part of
3:42why rates would move back up from
3:44the extraordinarily low levels they were at.
3:47- [Presenter] That's the chairman of The Federal reserve
3:49in March, 2021, talking about the rise in bond yields
3:52during the economic crisis.
3:54In 2020, The Fed had slashed short-term interest rates
3:57at controls to zero in an effort to bolster the economy
4:00and encourage spending.
4:02And bond yields, which are heavily influenced by
4:04the outlook of short-term interest rates
4:06also fell to record lows.
4:09Two years later, much of the economy has rebounded.
4:12- The economy has rapidly gained strength despite
4:15the ongoing pandemic, giving rise to persistent supply
4:18and demand imbalances and bottlenecks
4:21and to elevated inflation.
4:23- [Presenter] Last December inflation rose 7%
4:26from a year earlier.
4:27The fastest pace since 1982.
4:30This reflected rapidly rising prices
4:32on everything from houses to groceries.
4:34And when The Fed wants to restrain an overheated economy,
4:38it raises short-term interest rates.
4:40And when interest rates rise, bond yields go up as well.
4:44- If inflation is uncomfortably high,
4:46people don't like that.
4:47The Fed has a goal of keeping prices stable
4:51and so it'll try to cool the economy
4:53by raising borrowing costs.
4:56- [Presenter] Higher interest rates can send up
4:58the price of mortgages and other loans,
5:00which will likely slow down consumer spending.
5:03This sounds like a bad thing, but only to a point.
5:06Higher bond yields can help cool down the economy,
5:09which should bring down inflation in the longterm.