A treasury yield is the return an investor earns from holding a U.S. government Treasury security, such as a Treasury bond, note, or bill. It represents the annual interest rate paid by the U.S. government to investors who lend money by purchasing these securities.
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Treasury yields are widely used as a benchmark for interest rates across global financial markets.
Because U.S. Treasury securities are backed by the U.S. government, they are generally considered among the safest investments in the financial system. Treasury yields therefore play an important role in the broader economy, influencing interest rates for mortgages, corporate bonds, and other types of loans. Yields move inversely to bond prices, meaning that when demand for Treasury bonds rises, their prices increase and the yield falls. Conversely, when investors sell Treasury bonds, prices fall and yields rise. Changes in treasury yields are closely watched by investors because they often reflect expectations about inflation, economic growth, and central bank policy.
Short example:
Suppose an investor buys a U.S. Treasury bond for $1,000 with an annual interest payment of $40.
This means the treasury yield is 4 percent per year.
If market interest rates rise and the bond’s price falls to $950, the effective yield for a new investor becomes higher because the same $40 interest is earned on a lower purchase price.
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