Market Beat: Treasury bond yields at historic lows
TRUCKEe, Calif. andamp;#8212; Market action last week drove U.S. Treasury bond yields to historic lows. The yield on the benchmark ten-year Treasury bond was down to 1.46 percent which is essentially a 220-year low. The thirty-year bond traded as low as 2.56 percent which was the lowest yield since December 2008.The previous low yield on the ten-year bond was 1.54 percent and that happened in early 1946. The highest yield was in 1981 when it topped out at 15.84 percent. Back in 2007, yields were more than 5 percent and have averaged just less than 5 percent over the last twenty years.That means that if you were fortunate enough to have $1 million to invest in ten-year treasury bonds, youandamp;#8217;d get an annual income of about $15,000 right now. The average income since 1953, over almost a fifty-year period, would have been more than $60,000 for that same $1 million investment.Bond prices have an inverse relationship to their yields which means that bond prices are now at an all-time high. Since ten-year treasuries have had an average yield of almost 5 percent for the last twenty years, if you were to buy one today and then see interest rates rise back to 5 percent by 2014, your bond would decline in value by about 19 percent, so if you invested $10,000 now, the bond would have a value of $8,100 in 2014 if rates rose to 5 percent.The reason that the interest rates fluctuate is because they are driven by market forces. When new bonds are issued, they are sold at an auction by the Treasury department. The bidders set the yields by the price they are willing to pay. After the bonds are issued, they trade on the secondary market and yields fluctuate. With ongoing concerns about the situation in Europe, money is flowing into Treasury bonds as a safe haven.The more money that flows in, the higher the prices go and the lower the yields go. Buyers of the bonds will get their money back when the bond matures, but may see the value of their bonds decline prior to the maturity date if interest rates rise. In general low rates stimulate the economy and have an impact on mortgage rates which can help homeowners and the struggling housing market.Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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