One of the most significant of those opportunities has been a huge downturn in the yield on Treasury bonds and notes. In fact, 10-Year Treasury notes and 30-Year Treasury bonds are both currently priced at all-time lows.
Why should you care about this? Because as the Treasury yield goes down, interest rates for mortgages and other loans do as well. Let’s take a closer look at what Treasury bonds are, why the Treasury yield has suffered such a precipitous fall this year, and how you should respond.
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What Are Treasury Bonds and Notes?
Treasury bonds and notes are debt securities sold by the United States Treasury Department that come with a fixed interest rate. Both of these debt products pay interest semi-annually to investors in addition to repaying the full face value on the maturity date.
The only major difference between Treasury bonds and notes is how long it takes for them to mature. Treasury notes mature within 2 to 10 years, while Treasury bonds have maturity dates of over 10 years and up to 30 years. Because Treasury bonds have longer maturity dates, they also tend to offer higher interest rates.
What is the Treasury Yield?
As mentioned above, the Treasury Department sets a fixed interest rate for all of their Treasury notes and bonds. However, Treasury securities are sold at an auction to the highest bidder and they can be resold at any time in secondary markets. In both situations, investors may pay less or more than the face value of a Treasury security.
For example, an investor could purchase a $5,000 bond for $5,100. In this case, the investor would still receive the fixed interest payments every 6 months. But when the bond matures, the Treasury will only pay the face value, $5,000, despite the fact that the investor paid $5,100 to purchase it. This means that the investor’s overall return, or yield, on his investment will be lower than if he had purchased the bond at face value or at a discount.
Why would an investor pay a premium for a Treasury bond or note? Because government securities are considered incredibly low-risk. During times of economic uncertainty, investors will flock to them because of their perceived safety and security.
When there is high demand for Treasury securities and more investors are willing to pay a premium for them, the Treasury yield goes down. But when the economy and stock market are thriving, demand for government bonds and notes tends to go down. This, in turn, drives down their price and increases the Treasury yield.
How Does the Treasury Yield Affect the Economy?
Treasury yields are often used as a benchmark for the interest rates on other types of personal and business loans. For example, as the yield on the 10-Year Treasury note rises, so will the interest rates on 10 and 15-year mortgages. And as the yield on 30-year Treasury bonds goes down, the interest rates on 30-year mortgages tend to follow suit.
The Treasury yield is also an indicator of how investors feel about the economy. When the yield is high, it indicates that consumer confidence is high. But a low Treasury yield typically signals a high level of economic uncertainty. The Treasury yields are closely monitored by financial experts because they can act as a predictor of economic growth or recession.
The economic uncertainty caused by the coronavirus has caused the Treasury yield to hit lows never seen before. For example, in its entire history, the yield on the 10-Year Treasury note had never fallen below 1%. In fact, it had rarely fallen below 1.5%.
From November 2018 to August 2019, the yield on 10-Treasury notes dropped from 3% to nearly 1.5%. Yet, by December 2019, it had rebounded to nearly 2%. But then, in January 2020, the U.S. economy started to feel the effects of the coronavirus crisis and the 10-Year yield began to plummet.
As can be seen in the graph above, the nosedive continued throughout February. And for the first time ever, in March, the yield dropped below 1%. At its lowest point, the 10-Year Treasury yield was down to nearly 0.50%. It’s come up a bit since then, but is still at an astonishingly-low 0.61% as of this writing.
There have been similar drops to the yields of virtually every type of Treasury security. For example, the yield on 30-Year Treasury bonds are also at an all-time low of 1.31%. That’s a full percentage-point drop from 2.33% yield these bonds were offering on January 3rd, 2020.
How Can You Take Advantage of the Historically Low Yield on Treasury Bonds and Notes?
As mentioned earlier, the Treasury yield is the benchmark that mortgage rates follow the closest. So, as would be expected, mortgage rates have also recently hit historic lows.
At the end of April, the average interest rate on a 30-year mortgage was 3.33%. This marks the first time in 5 years that the average 30-year mortgage interest rate has fallen below 3.40%.
Now is the time to review your mortgage terms to see if you can lower your interest rate by refinancing. By refinancing, you may be able to drop your PMI (private mortgage insurance), reduce payments, shave years off your mortgage, or cash-out some of your home’s equity.
Keep in mind, that with these low rates will also come increased demand for refinancing. And that could cause lenders to raise their borrower requirements. But the Treasury yields (and thereby, mortgage rates) that we’re seeing right now are truly unprecedented. So if your credit score is strong, there may never be a better time to consider refinancing your mortgage.
Related: 5 Reasons to Refinance a Mortgage