Treasury Notes, Bonds and Bills

Treasury notes and bonds are sold by the U.S. Treasury Department to pay for the U.S. debt.  Essentially they are loans to the government.

  • Treasury notes are issued in terms of 2, 3, 5, and 10 years
  • Treasury bonds are issued in terms of 30 years.
  • Treasury bills are issued in terms of one year or less.

bondThe most popular Treasury product is the 10-year note.

Treasury yields only affect fixed-rated mortgages. The 10-year note affects 15-year conventional loans, while the 30-year bond affects 30-year conventional loans.

An advantage of investing in federal government securities, is that the interest payments are exempt from state and local income tax. However, they are still taxable at the federal level.

Treasury note and yields can impact mortgage rates

Treasury note and bond yields change every day and are resold on the open market. If the bond prices drops, this indicates there is not a lot of demand for Treasury notes and bonds, and that the yields increased. This makes it more expensive to buy a home, because mortgage interest rates rise. That lessens demand for homes, which puts downward pressure on home prices. This slows economic growth.  Conversely, low yields on U.S. Treasury notes mean lower rates on mortgages, which can stimulate the real estate market, which stimulates the economy. Worth noting the Treasury Yields Only Affect Fixed-Rate Mortgages

Historical Fact

On June 1, 2012, the yield on the 10-year Treasury note dropped briefly during intra-day trading to 1.442%, the lowest in 200 years. By the end of the day, the rate closed just a bit higher, at 1.47%. Nevertheless, this forced mortgage interest rates down to record lows.

Why was the Treasury yield so low? Investors were panicked by a lower-than-expected U.S. employment report, and by ongoing worries about the eurozone debt crisis. They sold stocks, driving the Dow down 275 points. They put their cash into the only safe haven, U.S. Treasury notes. (Gold, the safe haven in 2011, was down thanks to lower economic growth in China and the other emerging market countries.)


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