Sunday, March 9, 2014

Treasury

Treasury yield is directly proportional to corporate bonds yield. Since corporate is risky so gives high yield.
If in secondary market treasury yield increase ( short term) this may not be good sign to economy as investors don't want to hold treasury because  of the fear of government to get default such purchase price decrease and yield increases.

Treasury yields increase ( low price) so do the interest rates on fixed-rate mortgages. This makes it more expensive to buy a home, so demand for homes decrease, and therefore so do the prices of homes. This, then, has a negative impact on the economy. On the other hand treasury yield decreases IR decreases dollar depreciates and this up to some point is good for economic expansion.

Normal yield curve - long term (note, bill) yield > short run ( bill) sign of expansion.
Inverted yield curve sign of recession.

The yield curve measures the difference between shorter-term 2-year notes and longer-term 10-year note yields.  Well, when the spread between the interest rates of the two notes widens, or the yield curve rises, it typically indicates that the economy is headed for recovery.

The term interest rate could mean anything from the Federal Reserve's Fed funds rate to any of the Treasury Note yields to the 30-year fixed

An existing bond’s market value will decrease when the market interest rates increase. The reason is that an existing bond’s fixed interest payments or coupon payments ( there is not effect on existing bond payments) are smaller than the interest payments now demanded by the market.

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