Why the Interest Rate of US Treasury Notes Matters
2023-10-25
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1The U.S. government needs money to operate.
2A lot of that money comes from taxes.
3However, much of the money the U.S. government uses to pay its costs comes from borrowing in the form of U.S. Treasury securities.
4Investors, who believe the U.S. government will be able to pay them back, agree to loan the government money for a period of time.
5They receive interest payments regularly or in a way set by the Treasury.
6The difference between the loan amount and the investment return is called the yield.
7In past years, the interest rate on the U.S. government 10-year note was low.
8For example, when the COVID-19 pandemic started, the interest rate for a 10-year government debt security was less than one percent.
9If you loaned the U.S. government $100, you would receive about one dollar a year in interest until the note "matures," or is paid back.
10Now, however, the yield has jumped to about five percent for a 10-year note.
11A note is a debt security with a term of between two and 10 years.
12That means investors who agree to lend money to the U.S. government for a period of 10 years will earn about a five percent return each year.
13That sounds good for investors.
14But everyone is not happy about it.
15The reason is that many other interest rates are tied to the U.S. rate for the 10-year note.
16In a recent report, the Associated Press called the 10-year note "the centerpiece of the global financial system."
17Many mortgage rates, the interest rates people pay for their home loans, are connected to the 10-year note.
18As a result, borrowing money becomes more costly.
19Over the life of a 30-year home mortgage agreement, a homeowner could pay hundreds of thousands of dollars more in interest than just two or three years ago.
20In addition, the high rates on the 10-year note make it harder for some new businesses to grow.
21A young business often does not make money.
22But if it wants to hire new people or create a new product, it will often take out a loan from a bank or agree to pay investors interest.
23Since the financial crisis of 2008, the cost of these loans has mainly been very low - only a little higher than zero percent interest.
24The low rates permitted many companies to borrow money at a low cost.
25Many of the world's economies that were struggling recovered because of the low rates.
26Individual investors bought stocks because they did not see a large cost to borrow money.
27They did not see U.S. Treasury securities as a good investment because their interest rates were so low.
28But now, interest rates are rising. As a result, some businesses are choosing not to expand.
29Some are even reducing their workforce in order to reduce operating costs.
30The cost of living increased quickly once many countries re-opened after the pandemic.
31Cars, food and energy prices all went higher.
32The war in Ukraine reduced the food and energy supply in Europe and Africa, so those costs increased for Europeans and Africans.
33Many people found that the usual amount of money did not buy the usual amount of goods.
34That is called inflation.
35In some countries, the price of food and energy doubled in a short time.
36Home prices increased because many people decided they needed more space if they were going to do their jobs from home.
37The fast inflation concerned government banks around the world.
38In countries such as the U.S. and areas like Europe, central banks decided to raise the interest rates they control as a way to reduce, or slow, inflation.
39Central bankers believe that increasing interest rates can keep people and businesses from spending too much money.
40To a point, the plan has worked.
41In the U.S., some data shows inflation is slowing.
42Economists who study the U.S. have been surprised that the economy stayed strong even as interest rates for Treasury securities have increased.
43People are still spending money and the employment rate is high.
44But some investors are thinking that a yield of about 5 percent is better than putting money into stocks that might lose value.
45As a result, stocks prices have dropped since the summer.
46Because U.S. Treasury securities are not a high-risk investment, the U.S. dollar has gotten stronger compared to the Euro, the British pound and the Australian dollar.
47High interest rates also hurt some investors who decided to put their money in safe U.S. Treasury securities five or 10 years ago.
48If those investors purchased bonds paying a lower interest rate than today, they would lose money if they tried to sell those securities on the open market now.
49One large investment fund that purchases U.S. debt securities with different terms has lost three percent of its value this year.
50If this situation continues, the fund is on track to lose value for the third year in a row.
51I'm Dan Friedell. And I'm Caty Weaver.
1The U.S. government needs money to operate. 2A lot of that money comes from taxes. However, much of the money the U.S. government uses to pay its costs comes from borrowing in the form of U.S. Treasury securities. 3Investors, who believe the U.S. government will be able to pay them back, agree to loan the government money for a period of time. They receive interest payments regularly or in a way set by the Treasury. 4The difference between the loan amount and the investment return is called the yield. 5In past years, the interest rate on the U.S. government 10-year note was low. For example, when the COVID-19 pandemic started, the interest rate for a 10-year government debt security was less than one percent. If you loaned the U.S. government $100, you would receive about one dollar a year in interest until the note "matures," or is paid back. 6Now, however, the yield has jumped to about five percent for a 10-year note. A note is a debt security with a term of between two and 10 years. That means investors who agree to lend money to the U.S. government for a period of 10 years will earn about a five percent return each year. 7That sounds good for investors. But everyone is not happy about it. 8The reason is that many other interest rates are tied to the U.S. rate for the 10-year note. 9In a recent report, the Associated Press called the 10-year note "the centerpiece of the global financial system." 10Many mortgage rates, the interest rates people pay for their home loans, are connected to the 10-year note. As a result, borrowing money becomes more costly. Over the life of a 30-year home mortgage agreement, a homeowner could pay hundreds of thousands of dollars more in interest than just two or three years ago. 11In addition, the high rates on the 10-year note make it harder for some new businesses to grow. A young business often does not make money. But if it wants to hire new people or create a new product, it will often take out a loan from a bank or agree to pay investors interest. Since the financial crisis of 2008, the cost of these loans has mainly been very low - only a little higher than zero percent interest. 12The low rates permitted many companies to borrow money at a low cost. Many of the world's economies that were struggling recovered because of the low rates. Individual investors bought stocks because they did not see a large cost to borrow money. They did not see U.S. Treasury securities as a good investment because their interest rates were so low. 13But now, interest rates are rising. As a result, some businesses are choosing not to expand. Some are even reducing their workforce in order to reduce operating costs. 14Why did the interest rates rise so fast? 15The cost of living increased quickly once many countries re-opened after the pandemic. Cars, food and energy prices all went higher. The war in Ukraine reduced the food and energy supply in Europe and Africa, so those costs increased for Europeans and Africans. 16Many people found that the usual amount of money did not buy the usual amount of goods. That is called inflation. In some countries, the price of food and energy doubled in a short time. Home prices increased because many people decided they needed more space if they were going to do their jobs from home. 17The fast inflation concerned government banks around the world. In countries such as the U.S. and areas like Europe, central banks decided to raise the interest rates they control as a way to reduce, or slow, inflation. 18Central bankers believe that increasing interest rates can keep people and businesses from spending too much money. To a point, the plan has worked. In the U.S., some data shows inflation is slowing. 19Economists who study the U.S. have been surprised that the economy stayed strong even as interest rates for Treasury securities have increased. People are still spending money and the employment rate is high. 20But some investors are thinking that a yield of about 5 percent is better than putting money into stocks that might lose value. As a result, stocks prices have dropped since the summer. 21Because U.S. Treasury securities are not a high-risk investment, the U.S. dollar has gotten stronger compared to the Euro, the British pound and the Australian dollar. 22High interest rates also hurt some investors who decided to put their money in safe U.S. Treasury securities five or 10 years ago. If those investors purchased bonds paying a lower interest rate than today, they would lose money if they tried to sell those securities on the open market now. 23One large investment fund that purchases U.S. debt securities with different terms has lost three percent of its value this year. If this situation continues, the fund is on track to lose value for the third year in a row. 24I'm Dan Friedell. And I'm Caty Weaver. 25Dan Friedell adapted this story for Learning English based on a report by the Associated Press. 26____________________________________________________ 27Words in This Story 28fund (mutual fund) -n. a kind of investment that uses the money from many different people to buy investments and which shares the risk and returns with its investors 29on track -adj. happening as expected 30in a row -adj. one after another 31We want to hear from you. Do you think the bond prices will stay high?