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USA Bond & Yield

U.S. government bonds are seen as a safe-haven investment for investors, with Treasury yields seen as an indicator of investor sentiment regarding the economy

Low yields

Recent U.S. bond yields (30.08.2021 5PM EDT):

  • The United States 10Y Government Bond has a 1.289% yield.
  • 10 Years vs 2 Years bond spread is 108.4 bp. Normal Convexity in Long-Term vs Short-Term Maturities.
  • Central Bank Rate is 0.25% (last modification in March 2020).
  • The United States credit rating is AA+, according to Standard & Poor’s agency.
  • Current 5-Years Credit Default Swap quotation is 10.00 and implied probability of default is 0.17%.

10-Year Government bond yield across different countries (30/08/2021 5PM EDT):

U.S. Yield Curve – 30/08/2021:

10-year bond yield across different developed countries

The U.S.

The U.K.



Impact of rate hike:

The Federal Reserve aims to keep the U.S. economy in a healthy status, not too hot, not too cold.

When Fed talk about an interest rate hike, they are referring to the federal fund rate, also called the federal fund target rate. When the Fed raise the interest rate, it helps cool down the economy.  the federal funds rate is an important benchmark for interest rates in the U.S. economy and it influences interest rates throughout the global economy as a whole.

What is the impact of an interest rate hike?

It increases the costs of credit throughout the economy.  Higher interest rates lead to more expensive loans for both businesses and consumers. As result, people spending more on interest payments. It also reduces the supply of money in circulation, which tends to lower inflation and moderate economic activity, that is, it cools off the economy.


Higher market interest rate also has a negative impact on the stock market. When the Fed rises rate, borrowing money will be more expensive, the cost of doing business increases for public and private companies. Higher costs and less business could mean lower revenues and earnings for public firms, potentially slow their growth rate and their stock values.


Variable-rate loans are more sensitive to Fed rate changes than consumer credits as the interest rates they charge are based on benchmarks that reference the fed funds rate. New fixed-rate loans can see higher interest rates, but existing ones are immune to changes to the fed funds rate.


Current CPI & Impact of COVID-19 on bond market

“This decline in bond yields could be signaling that the inflation burst is transitory, and/or that the Delta variant will slow growth, although at 1.25% this morning that seems extreme,”, the founder and chairman of Evercore ISI and head of economic research, Ed Hyman said.


The spread of the variant of Covid-19 also causes concerns about a deceleration in global economic growth, sending investors into the safety of U.S. Treasuries.


The yield decline in recent weeks represents a sharp reversal from a dramatic rise that started in late 2020. After entering January below 1%, the benchmark 10-year yield rallied above 1.7% in March before retrenching near the 1.6% level for much of April.


“Over the past few months, many portfolio managers were expecting the 10-year Treasury yield to rise and held short positions in bonds. With the Federal Reserve reiterating its patient stance on tapering in Wednesday’s minute’s report, many portfolio managers changed course and covered their short positions in bonds, which drove up bond prices and pushed yields down,” said George Ball, chairman of Sanders Morris Harris.


A volatile environment for government bonds indicates a highly uncertain future for the U.S. economy, pointing to both slower growth and stubborn inflation. Treasury yields have fallen back sharply after the rally earlier this year as investors are worried about price increases to the potential that the rapid burst in post-pandemic activity could start to slow down.


“The market is trading on the stagflation theme,” said Aneta Markowska, a chief financial economist at Jefferies. “There’s the idea that these price increases are going to cause demand destruction, cause a policy mistake, and ultimately that slows growth.”

Yields have an inverse relationship with bond price, so a drop in price indicates that investors are buying up bonds and pushing prices higher.


Investors are still concern about the resurgence of the Covid-19 delta variant. Slowing growth and rising inflation could be put downside pressure on the current investing landscape. The Treasury market is often far more deliberate than the equity market which can swing wildly on headlines both good and bad. At its current level, the bond market is taking a cautious view of what’s ahead.

Current COVID-19 situation

COVID-19 situation:

COVID-19 Situation in the U.S.

Demand: regulatory requirements

Government bonds play an important role in financial markets as collateral, liquid assets, and as a reference rate for other securities. Some government bonds are extensively used in securities financing transactions and as collateral in derivatives transactions. In many jurisdictions, central government debt markets are the deepest and most liquid markets.


Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision, and risk management of banks.

Key principles of Basel III:

Minimum Capital requirements

Basel III requires a 4.5%  minimum capital ratio for banks, as a percentage of the bank’s risk-weighted assets. There is also an additional 2.5% buffer capital requirement that brings the total minimum requirement to 7%. Banks can use the buffer when faced with financial stress, but doing so can lead to even more financial constraints when paying dividends.


Risk-weighted assets are used to determine the minimum amount of capital that must be held by banks and other financial institutions, this helps them to reduce the risk of insolvency. The capital requirement is based on a risk assessment for each type of bank asset.


For assets such as Treasury bonds, the risk weight assessment will be different from a commercial loan, since a Treasury bill is backed by the government’s ability to continually generate revenues. The federal government has higher financial credibility, which results in a lower risk to the bank. Regulators require banks to hold commercial loans on their balance sheet to maintain a higher amount of capital, whereas banks with Treasury bills and other low-risk investments are required to maintain far less capital.


U.S. Treasury Securities Holders 2021Q1

Supply side:

Year-to-Date (YTD) statistics:

  • Issuance (as of August) $13.4 trillion, -3.1% Y/Y
  • Trading (as of July) $625.1 billion, -3.1% Y/Y
  • Outstanding (as of July) $21.7 trillion, +8.5% Y/Y