Treasury bonds are basically bets investors charging the U.S. Treasury to raise money. These rates vary in different lengths, forming the yield curve. There are a number of economic factors affecting the yield of Treasury bonds, such as interest rates, inflation and economic growth. All these factors usually affect each other as well.
Key Factors Affecting The Yield Of Treasury Bonds
Yield of bonds is a source of anxiety for investors around the world. The yield on Treasury bonds are the main reference point from which all rates were calculated. Treasury bills are considered the safest asset in the world, given the depth and resources of the U.S. government.
When the Federal reserve lowers its key interest rate, the rate on Federal funds, it creates additional demand for treasuries, as they can lock the money at a specific interest rate. This additional demand for treasuries leads to lower interest rates.
If you experience inflationary pressure, the yield of the Treasury to move higher as fixed income products become less desirable. In addition, inflationary pressures tend to force Central banks to raise interest rates to reduce money supply. In an inflationary environment, investors are forced to achieve greater yields to compensate for decreased purchasing power in the future.
Strong economic growth usually leads to an increase in aggregate demand that leads to higher inflation, if it persists over time. During strong periods of growth, there is competition for capital. As a result, investors have many options to generate high yield.
In turn, the yield of Treasury bonds on Treasuries must rise to find equilibrium between demand and supply. For example, if the economy is growing at five percent, and shares bring in seven percent, very few people will buy treasuries, if they give more than stock.