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The Reason Treasury Yields are Increasing

Treasury Yields are the effective annual interest rate that the U.S. government pays on one of its debt obligations, expressed as a percentage 1. In other words, it is the annual return investors can expect from holding a U.S. government security with a given maturity. Treasury yields don’t just affect how much the Government pays to borrow and how much Investors earn by buying Government Bonds. They also influence the interest rates consumers and businesses pay on loans to buy Real Estate, Vehicles, and Equipment.

The Treasury holds Auctions for three types of securities. They are described as Bills, Notes, and Bonds. Auctions are organized by the type of Security and held through Treasury Direct. Treasuries can also be purchased on Secondary Markets through a Broker like eTrade.

  • Bills: Those ranging from 4-week to 8-week are offered weekly. 13-week and 26-week Bills are also offered each week except for Holidays and special circumstances.
  • Notes:  2-year notes are offered monthly. 3-year notes are offered monthly, in the first half of the month. 5-year notes are offered monthly. 7-year notes are offered monthly, in the second half of the month.
  • Bonds: 20-year bonds are offered quarterly (in February, May, August, and November). 30-year bonds are offered quarterly (in February, May, August, and November).

The Yields of Treasuries

Treasury yields are the effective annual interest rate that the U.S. government pays on one of its debt obligations, expressed as a percentage.  In other words, it is the annual return Investors' can expect from holding a U.S. Government Security with a given maturity.

Treasury yields don’t just affect how much the Government pays to borrow and how much Investors earn by buying Government Bonds. They also influence the interest rates consumers and businesses pay on loans to buy Real Estate, Vehicles, and Equipment. As I see the field, all things compete with Treasuries and from the Point-of-View from lenders, they may be weighing the return of giving a loan vs a Treasury (And Vise Versa).

Influencing Higher Yields

  • Economic Growth: When the Economy is growing, Investor's will likely seek higher yields. Keep in mind, Treasuries are an Auction. If an Investor has a seemingly higher opportunity, they are not likely going to bid higher prices that are conducive to a lower return, in the Auction.
  • Monetary Policy: If the Federal Reserve increases the cost of Money, "Tightening monetary Policy,", Bond prices can decline sending the yields higher.
  • Supply and Demand: The old Adam Smith Analogy applies here too. If there are more Bonds than Investors, Auction may decline and send the yields higher.
  •  Inflation: When the Buying-Power of money declines, Investors are likely to seek higher return on their investment.

Increasing Auctions

On October 29th, yesterday, Reuters publish a story explaining there is significant probability the Treasury will increase Treasury Auction across the board (Bills, Notes, and Bonds) to help pay off Debt. I think the situation is troubling because the Government's Cost to pay down debt is increasing. Thereby, "Kicking the can down the road".

In conclusion, Investors are seeing a modest increase in yields through the Secondary Markets. In addition, higher yields are seen through CD's and with declining Stock Prices, through Dividends. I favor Tax Advantaged Dividends. Especially living in NJ with high Sales and Income Taxes. I haven't seen yields this high in a longtime. This offers more reason to be a saver than a spender.

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