Treasury yields and the curve
Government bonds of different lengths pay different rates. The shape that makes is the most watched line in finance.
A government bond is a loan to the state. You hand over money, receive fixed payments, and get the principal back at the end. The yield is the return you earn if you hold it to maturity.
The relationship that trips everyone up
The bond's payments are fixed when it is issued. If you pay less for that fixed stream, your return is higher; pay more and your return is lower. So a falling bond price and a rising yield are the same event described two ways.
What the curve is
Plot the yield of government bonds against how long they run — three months, two years, ten years, thirty — and you get the yield curve. Normally it slopes upward: lending for longer earns more, because more can go wrong over a longer wait.
- Steep. Long rates well above short ones. Often associated with expectations of growth or inflation ahead.
- Flat. Little difference. The market sees no strong case either way.
- Inverted. Short rates above long ones. The market expects short rates to be lower in future than they are now.
What sits inside a long yield
Two things. The first is the market's expectation of the average short-term rate over the bond's life. The second is the term premium — extra compensation demanded for locking money away and bearing the risk that rates move.
A central bank sets an overnight rate directly. The ten-year is a market price containing a decade of expectations plus a premium. It can rise while the central bank cuts, and fall while it raises, and neither is a malfunction.
Why it reaches your life
Long-dated government yields are the reference point for almost all other long-dated borrowing. Fixed mortgage rates track them far more closely than they track the central bank's rate, which is why a rate cut does not automatically make a house cheaper to finance.