Treasury bonds are a popular choice for investors looking for a reliable source of income backed by the U.S. government. However, understanding how these bonds are priced at auction can be confusing, especially when comparing the High Yield and the Interest Rate (Coupon Rate) columns. In this post, I'll break it down using a real-world example.
A Look at a Recent Treasury Bond Auction
Here’s an example of a 20-year Treasury bond that was recently auctioned:
| Security Term | CUSIP | Reopening | Issue Date | Maturity Date | High Yield | Interest Rate |
|---|---|---|---|---|---|---|
| 20-Year | 912810UF3 | Yes | 01/31/2025 | 11/15/2044 | 4.900% | 4.625% |
What Do These Numbers Mean?
CUSIP: This is a unique identifier for the bond.
Reopening: Since it says "Yes," this means the bond was originally issued earlier and is now being reoffered.
Issue Date: January 31, 2025—this is when the bond will be officially issued to investors.
Maturity Date: November 15, 2044—this is when the government repays the principal.
Interest Rate (Coupon Rate): 4.625%—this is the fixed rate the government pays on the bond’s face value.
High Yield: 4.900%—this is the actual yield investors receive based on the auction results.
Understanding High Yield vs. Coupon Rate
When the high yield is higher than the coupon rate, the bond is sold at a discount (below face value). This is because investors require a higher return than the stated interest payments.
Example Calculation:
If you buy this bond at auction, you won't pay exactly $1,000 per bond.
Instead, you'll pay less than $1,000 because the 4.625% coupon is lower than the market-driven yield of 4.900%.
This discount ensures that, when factoring in both the semiannual interest payments and the principal repayment at maturity, the total return aligns with a 4.900% yield.
Why Does This Matter to Investors?
Understanding the relationship between high yield and coupon rate is crucial for bond investors. If market rates have risen since the bond’s original issuance, new investors will demand a higher yield, and the bond will be sold at a discount. On the other hand, if interest rates have fallen, the bond could be priced at a premium (above face value).
For investors seeking predictable income, buying bonds at auction can be a great option. However, knowing how yields impact bond prices helps in making informed investment decisions.
Want to Learn More?
If you're interested in participating in Treasury bond auctions, you can register at TreasuryDirect, the official platform for purchasing U.S. government securities directly from the U.S. Department of the Treasury.
Share Your Thoughts!
What are your thoughts on Treasury bonds? Have you ever participated in an auction? Let us know in the comments below!
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please consult with a financial professional before making any investment decisions.
