Our national obsession with the ‘tenure’ T-note, explained
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Christopher Karl Johanson from Asheville, North Carolina wrote in to ask us why we’re always reporting about something called the “tenure teanote.” He was only kidding, of course, he meant the 10-year Treasury note, the price of which we register every day.
So what is the 10-year note…and why is it such a big deal?
A Treasury bill, note, or bond is another name for “lending the government money.” The amount of the loan is known as “par,” so if you loan the government $1000 by purchasing a $1000 treasury, the “par value” of that security is … $1000.
There are different names for Treasuries depending on how long their life is: A T-bill refers to a loan of a year or less, a T-note is for 2, 3, 5 or 10 years, a T-bond is for more than 10 years. The 10-year T-note is one of the most important.
Like any other loan, Treasuries offer an interest rate. In other countries, whose governments are not considered to be a safe investment, investors demand higher rates of interest. Compared to the rates on most loans, interest rates on loans to the U.S. government are fairly low.
“That’s because the government loans are considered very safe,” says Krista Schwarz, who used to work at the Open Market Desk at the Federal Reserve Bank of New York. They’re in charge of auctioning of freshly minted Treasuries.
In the old days when these securities were made out of paper, they would have a detachable “coupon” representing the interest payments. You’ll hear the yearly interest payments referred to as “coupon” payments, even though all new Treasuries are entirely digital these days.
When a Treasury security is freshly minted, it’s sold at auction at the Federal Reserve Bank of New York. The government is trying to get the lowest interest rate, while investors want a higher one.
But that’s usually not the “price” you’ll hear announced here on Marketplace, either.
That’s because after a Treasury is created and auctioned off, it’s almost sure to be bought and sold again and again on the open market. Individuals do this to diversify their portfolios. So do banks.
Even though the par value of the security (the amount you’ll get paid back at the end of the life of the security) and its coupon payments are permanent, the price people actually pay for that security on the open market can change based on supply and demand.
You can imagine a situation where an investor would say to him or herself, “Well, I know that this T-note is worth $1000 and has $20 annual payments for 10 years. But I really would rather have my money in something safe, so I’ll be willing to pay $1050 for it.”
It’s just that sort of insight into investor thinking that makes the price of Treasuries useful to observers of the economy.
Are Treasury prices up? Well, it means people really want Treasuries, perhaps because they think the economy is troubled or there’s instability in some major global market.
Are Treasury prices down? It perhaps means that people believe the economy is doing well, there are other places to invest for better returns.
The yield is the return someone would make on a Treasury security if they bought it and held onto it. Yields and prices move in opposite directions.
The yield is closely related to the price. Remember how the par value of a bond and its coupon payments would stay the same, but price would change? A rising price would eat into that return. A falling price would make that return look bigger.
If someone, to repurpose the example above, pays more than the par value (say pays $1050 for a $1000 T-note), that higher price cuts into their return. When it was originally issued, the return might have been 2 percent, but when you factor in the math and the fact that someone has bought it for a higher price, the actual return on that person’s investment is something less than 2 percent. Again, the higher price eats into the return.
The opposite can happen too.
WHY CARE ABOUT YIELD?
“People should care about it for a couple of reasons,” says John Elder, professor at Colorado State University. “Treasury bonds can be an indicator of interest rates on loans elsewhere in the economy.”
Car loans, your mortgage, and maybe your credit card are all often related to the yield on a 10-year T-note. Why? A bank can either lend money to a consumer, or it can lend it to Uncle Sam.
“As the yield on 10-year Treasuries go up, you might think banks would be less willing to lend out. If I could earn 4 percent on a U.S. Treasury, I’d be less willing to make a car loan of similar maturity for less than 4 percent,” says Elder.
Crudely speaking, Treasuries compete with our car loans and our mortgages. Some loans, like student loans, have interest rates that are calculated directly from the interest rates on Treasuries. If Treasury yields go up, interest rates go up. If Treasury yields go down, interest rates go down.
However, it’s important to compare Treasuries and loans of similar maturities, otherwise the link doesn’t work very well. Comparing interest rates on one month T-bills to a car loan is like comparing apples and oranges.
Big thanks to: Jeffrey Omura who played the part of Bill, and Mike Matlock, Tom Vendafreddo, and Lauren Iezzi for their singing talents in the audio above.
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