Understanding Treasury Yields and Interest Rates

Your money’s protected from a bank failure, if it’s within FDIC limits and guidelines. Rising rates significantly impacted bond prices in 2022, McBride says. A 30-year Treasury bond yields about 4.25 percent (as of September 2024). If that yield is not higher than inflation, then your investment loses purchasing power. Of course, because Treasury bonds are traded on an exchange, you can also buy them at any time the market is open through a broker or bank offering such services. Keep in mind, I bonds may not be as convenient to buy and manage as other securities.

Interest rate changes depend on when we issued the bond

• The angst in the bond market matters to more than just bond investors.
• The yield on a 10-year bond has surged to its highest level since 2008, while the yield on a 30-year bond is at its highest since 1998, meaning it costs the government more to borrow over the long term.
• This interest is exempt from state and local taxes, but it’s subject to federal income tax, according to TreasuryDirect.

Yes, changes in interest rates can impact various types of bonds differently depending on factors such as bond duration, credit quality, and market conditions. Municipal bonds are affected by interest rates similarly to other bonds. However, their interest payments are often tax-free, so their prices may be less sensitive to interest rate changes than taxable bonds.

Credit report summary

A strong year for investment performance fueled flows into products, and those fees contributed to revenue beats. Management commentary noted a resilient U.S. economy, healthy consumers and low unemployment, but cautioned that risks remain around inflation and geopolitics. The nominal interest rate is the stated interest rate of a bond or loan or the actual price borrowers pay lenders to use their money. If the nominal rate on a loan is 5%, borrowers can expect to pay $5 of interest for every $100 loaned to them.

What’s happening in the bond markets?

Much of that is due to a string of reports showing the U.S. economy remains much more solid than expected. Inflation was also more stubborn to ease, though this past week’s reading offered more optimism and helped Treasury yields give back some of their big gains. But the Fed’s influence is limited when it comes to the interest rates that are currently knocking the stock market around, chiefly the 10-year Treasury yield. The Fed controls the federal funds rate, which is a very short-term interest rate that dictates what banks charge each other for borrowing money overnight. When people refer to “the national interest rate” or “the Fed rate,” they’re usually referring to the federal funds rate set by the Federal Open Market Committee (FOMC). This is the rate of interest charged for the interbank transfer of money held by the Federal Reserve.

To attract demand in the bond market, the price of the pre-existing zero-coupon bond would have to decrease enough to match the return yielded by prevailing interest rates. In this instance, the bond’s price would drop from $950 (which gives a 5.26% yield) to approximately $909.09 (which gives a 10% yield). When interest rates rise, bond prices usually fall, and vice-versa.

Impact of Interest Rates on Different Types of Bonds

The intent is to give the economy breathing room after the Fed earlier hiked the federal funds rate to a two-decade high in hopes of slowing the economy enough to stifle inflation. Even though no periodic interest payment is made on a zero-coupon bond, the annual accumulated return is considered to be income and is taxed as interest income. Zero-coupon bonds tend to be more volatile as they do not pay periodic interest during the life of the bond. Upon maturity, a zero-coupon bondholder receives the face value of the bond. Thus, the value of these bonds increases the closer they get to expiring. If they dropped to 3%, the zero-coupon bond, with its yield of 5.26%, would suddenly look very attractive.

Because I bonds are held for a year or longer, they should be invested in after you have an adequate emergency fund. The following chart compares the 10-year Treasury note yield (red line) to the two-year Treasury note yield (purple line) from 1977 to 2016. The spread between the two rates, the 10-year minus the two-year, (blue line) is a simple measure of steepness.

Some government bonds tied to inflation have started paying higher rates to account for increasing costs. Government-issued Series I bonds purchased between May 1, 2024 and October will pay interest at an annual rate of 4.28percent, according to TreasuryDirect. The interest rate on I bonds is tied to inflation and changes every six months. Treasury yields rise with inflation in order to make up for the loss in what is the interest rate on bonds purchasing power. Interest rates and bond yields both increase and prices decrease when inflation exists.

When inflation is high, the purchasing power of money decreases. Government bonds are considered among the safest investments as the full faith and credit of the issuing government back them. This means the government promises to honor its debt obligations, even if it has to raise taxes or print money to do so. The time to maturity can vary widely among different bonds, from short-term bonds that mature in a few months or years to long-term bonds that may not mature for several decades. From July through October 2024, the Consumer Price Index (CPI) increased 0.2% a month.

I bonds earn interest from the first day of the month you buy them. The combined rate is sometimes called the “composite rate” or the “earnings rate.” A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.