Bond yields have hit an all-time low — What does that mean?

With many investors seeking stability during the COVID-19 pandemic, there’s been a steady rush toward US Treasury securities. These include short-term Treasury bills as well as longer-term Treasury notes and bonds (“T-Bonds,” as they’re also called, usually last between 10 and 30 years). These investments are backed by the full faith and credit of the US government, so they’re generally considered low-risk if held for their full term.

However, coronavirus threw a wrench into the Treasury market, and frankly, we’ve seen some strange shifts. In March, for example, the yield (the ratio of a bond’s interest payment to its current price) on the 10-year Treasury fell below 1% for the first time ever. Shorter-term T-Bills briefly even had negative yields.

It’s important for all investors to pay attention to the Treasury market because it can help indicate which way the economy is headed. Ultimately, this can influence all sorts of things—whether you can refinance your student loans, what interest rate you’ll pay when you buy a house, and even how you approach investing generally.

By way of background, before investors buy bonds, they usually calculate their current yield. This is a ratio of a bond’s interest payment to its current price. So, it essentially tells the investor how much income they can expect to earn relative to their investment. (Like stocks, bonds trade in a secondary market, so prices and yields can vary.)

Swapping stocks for low-yield bonds is like switching from High-Intensity Interval Training (HIIT) to walking on a treadmill...

HIIT can push you to the limits of your physical abilities. You hope to see massive gains, but it can be absolutely bruising. You might even risk injury (i.e., lose part, or all, of your investment). By contrast, walking on a treadmill is decidedly calmer. You definitely won’t build a beach body, but you probably won’t wake up sore every morning either. Both exercise routines have their merits. Which one you pick (or how you balance your training) depends on your risk tolerance, your goals, and your time horizon. Likewise, you have to decide what mix of investments is right for you.

Since Treasury bonds are backed by the US government, they’re generally considered low-risk investments if held to maturity. People trust that the government will make interest payments, which are usually made every six months.

Plus, there’s comfort in the knowledge that your interest payments won’t change. Once you buy a bond, your interest payments are locked in for a specific length of time, ranging anywhere between 10 and 30 years. (The same thinking applies to shorter-term government debt, too, as yield on Treasury bills and Treasury notes tends to remain stable.)

However, if interest rates change, the relative value of your investment(s) could fluctuate. For example, if interest rates rise, new bonds will pay a higher rate, so an investor’s existing bonds that pay a lower interest rate wouldn’t be as attractive on the open market. As a result, if you want to sell your bonds before they’re fully paid out (i.e., “reach maturity”), you probably won’t receive the same amount that you paid.

Low bond yields typically indicate a rocky economy, but they can offer other useful signals, too. 10-year Treasury bonds generally serve as a benchmark for consumer loans like mortgages and student loans. And now that yields have fallen dramatically, consumer loan rates are likely to follow suit. This correlation is a bit harder to follow today, because there’s less of a historical precedent. But if the investment world becomes more stable, you can typically look at Treasury bonds to get an indication of where consumer loan rates will go.

Historically, interest rates on 30-year fixed-rate mortgages are correlated with 10-year Treasury yields. In addition, lower Treasury yields could cause rates on student loans to drop. People with private student loans might shop for more favorable terms and people with existing loans might be able to refinance,either shortening their repayment period or lowering their monthly payments. (The same holds true if you have a car payment.) Depending on your situation, it could be worth looking into refinancing opportunities.

While the global COVID-19 pandemic may seem like unchartered territory, there are still several markers that can help give investors a better understanding of the markets. Seeing bond yields rise, for example, may suggest that the country (and the world) are on the path to recovery. (However, it could also indicate a price collapse, which would be quite concerning.) Still, in the meantime, tracking bond yields can help investors gauge other interest rates like mortgages and federal student loans, which may influence their investment approach.