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What is a bond yield?

Marketplace Staff Nov 7, 2011
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What is a bond yield?

Marketplace Staff Nov 7, 2011
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Steve Chiotakis: Greek Prime Minister George Papandreou could step down as early as today when a unity government takes over. The new Greek parliament will then have to push through big cuts needed to get the next installment of a European bailout.

Over in Italy, which has an even bigger debt problem yields on government bonds rose to above 6.5 percent today — levels not seen since the country’s been using the euro.

But what exactly is a bond yield? And how does it affect a country’s financial future?

Brian Rehling is chief fixed income strategist at Wells Fargo Advisors. He’s with us now from St. Louis. Good morning.

Brian Rehling: Good morning Steve. Thanks for having me.

Chiotakis: You got it. You know, Brian, we hear a lot in the media — sometimes on this program as a matter of fact — about the yield on notes and treasuries. I mean, those are the country’s bonds, but what exactly is a yield on those bonds?

Rehling: When we look at yield in the bond market, you can just think about it as the interest rate these countries have to pay for people to lend money to them. So you know know, if the yield is 5 percent, then the market is saying that that country would have to pay 5 percent to borrow money for that length of time.

Chiotakis: Why does it matter for a country what the yield is on their debt? Five percent, 6 percent — whatever it may be.

Rehling: Well, since countries have to continually borrow money to pay their debts, when yields go up, they have to pay a lot more money to borrow. So it’s much cheaper to fund yourself if people are willing to lend you money at very low rates — or very low yields — than it is at higher yields.

Chiotakis: Is there a point, Brian, of no return? That it’s just too expensive to borrow money anymore?

Rehling: Yeah, every country would have a point where those expenses get quite high. I’m not sure if there’s a magic number for any one country, but as yields do get higher it takes up a larger portion of their overall budget, and that total overall interest expense as a portion of the budget becomes unsustainable. And even additional cost cutting in other areas, or revenue generation in other areas, it just becomes unsustainable in order to fund themselves as rates move higher and higher.

Chiotakis: Brian Rehling with Wells Fargo Advisors. Brian, thank you.

Rehling: Thanks Steve.

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