Bonds Introduction
Good morning!
I hope everyone had a great Labor Day weekend.
With 10-Year and 30-Year treasury bonds at multi year highs, lets take a second to take about what the heck these things are.
For lack of better words, bonds are just debt, an entity or individual will sell bonds to institutions or investors, with a coupon rate (interest rate) and that is the return in the investor can expect to make on top of their principal.
There are different types of bonds, that function in their own way because they are used for different purposes.
Below you will find a list of US Government Securities
1. Treasury Bill , 1 year or less, zero coupon
2. Treasury Note, 2-10 years, pays semi annual interest
3. Treasury Bond, up to 30 years, pays semi annual interest
4. STRIPS - long term, zero coupon
5. TIPS - long term, long term, pays semi annual interest
The 30-year treasury note is currently yielding 5.27%, the highest level seen since 2007,
what does that mean?
1. Inflation and interest rate fears.
2. Debt supply pressure
Recent comments from federal reserve officials and rising energy costs; with brent crude approaching $100 a barrel, have forced markets to price in the possibility of further rate hikes or a prolonged higher for longer stance.
Expanding government deficits are requiring massive amounts of new treasury issuance, testing the market's capacity and pushing yields higher to attract buyers.
Essentially, you can average 8-10% in the market, at the same time turn right around and yield 5.27% from a 30-year treasury note, which is how the US pays their debt, by issuing debt.
