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  • - [Presenter] Few things in the economy

  • are more closely watched than bond yields.

  • - There are forces in play that merit watching.

  • Some commodity prices

  • and 10-year treasury yields have climbed.

  • - [Presenter] That's the president of

  • The Federal Reserve of Atlanta last March

  • speaking about how The Fed gauges inflation

  • and why it's keeping a close eye on certain bond yields.

  • US government bond yields are a barometer for the economy,

  • but they're also more than that.

  • - US government bond yields are extremely important

  • to the US and even in the global economy.

  • Bond yields affect everything from the cost of a mortgage

  • to the cost of borrowing for businesses.

  • If you're borrowing money,

  • that's gonna be determined to a large extent

  • by US government bond yields.

  • - [Presenter] And changes in yields can impact you.

  • Here's how bond yields work

  • and why they're so crucial to the economy.

  • (bright music)

  • When we talk about a bond yield,

  • we're typically talking about the annualized return

  • an investor earns by holding a bond until its maturity date.

  • Let's break this down.

  • A bond is a contract with features that are set

  • from the start.

  • There's the maturity date,

  • which refers to the length of the bond's life.

  • This is generally two to 30 years.

  • Bonds that mature between two and 10 years

  • are also called notes.

  • Then there's it's face value, which is the amount

  • the bond is worth when it's first created

  • and the amount it is guaranteed to pay on the maturity date.

  • There's also the annual interest rate,

  • otherwise known as the coupon rate.

  • This is the fixed amount a bond pays each year

  • up to its maturity date.

  • So say an investor buys a new 10-year treasury note

  • with a face value of $1,000 and a coupon or yield of 4%.

  • Every year, the investor will receive $40

  • and on the 10th year, she'll get back the original $1,000

  • she paid for the bond.

  • But here's the thing, as soon as she buys that bond,

  • she can sell it to other investors

  • and when she does certain features of the bond

  • are subject to change.

  • If the economy is doing well, interest rates may go up,

  • which means new bonds will be issued at a higher yield,

  • bringing down the value of existing bonds.

  • Say a new batch of 10 year treasuries pay a yield of 5%.

  • Suddenly this bond is less attractive to investors

  • and the price has dropped.

  • When the price goes down, the yield goes up

  • and when interest rates go down,

  • this same dynamic happens in reverse.

  • The inverse relationship between the price of a bond

  • and it's yield is key to understanding

  • why investors care so much about bond yields

  • and why you sometimes see yields and stocks

  • both going up at the same time.

  • - Investors generally like bonds

  • because they are a safe investment.

  • The problem is that that return is gonna be often lower,

  • much lower than stocks.

  • - [Presenter] Sam Goldfarb covers changes in bond yields

  • and how they're connected to financial markets

  • and the economy.

  • - If investors are confident about the economy,

  • they might not be satisfied with the small return

  • they can get from US government bonds.

  • They might choose to buy stocks instead.

  • - [Presenter] But climbing treasury yields also signal

  • that borrowing is getting more expensive.

  • - It's basically a proxy for longer-term interest rates.

  • If you want to get a rough sense of, you know,

  • where your mortgage rates are gonna be going,

  • you might look at the 10-year treasury note and it's yield.

  • - [Presenter] Bond yields aren't just watched

  • by economists and investors.

  • The Federal reserve keeps a close eye on them as well.

  • And they're not just watching.

  • Bond yields are a key part of monetary policy

  • that The Fed uses to help influence the economy.

  • - There has been an underlying sense

  • of an improved economic outlook, and that has to be part of

  • why rates would move back up from

  • the extraordinarily low levels they were at.

  • - [Presenter] That's the chairman of The Federal reserve

  • in March, 2021, talking about the rise in bond yields

  • during the economic crisis.

  • In 2020, The Fed had slashed short-term interest rates

  • at controls to zero in an effort to bolster the economy

  • and encourage spending.

  • And bond yields, which are heavily influenced by

  • the outlook of short-term interest rates

  • also fell to record lows.

  • Two years later, much of the economy has rebounded.

  • - The economy has rapidly gained strength despite

  • the ongoing pandemic, giving rise to persistent supply

  • and demand imbalances and bottlenecks

  • and to elevated inflation.

  • - [Presenter] Last December inflation rose 7%

  • from a year earlier.

  • The fastest pace since 1982.

  • This reflected rapidly rising prices

  • on everything from houses to groceries.

  • And when The Fed wants to restrain an overheated economy,

  • it raises short-term interest rates.

  • And when interest rates rise, bond yields go up as well.

  • - If inflation is uncomfortably high,

  • people don't like that.

  • The Fed has a goal of keeping prices stable

  • and so it'll try to cool the economy

  • by raising borrowing costs.

  • - [Presenter] Higher interest rates can send up

  • the price of mortgages and other loans,

  • which will likely slow down consumer spending.

  • This sounds like a bad thing, but only to a point.

  • Higher bond yields can help cool down the economy,

  • which should bring down inflation in the longterm.

- [Presenter] Few things in the economy

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