Factors That Affect U.S. Treasury Yields

$1000 denomination US Savings Bonds
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The bond market, especially U.S. Treasury yields, after often considered as a leading indicator of economic conditions.

For over 100 years, yields on 10-year U.S. Treasury notes (T-notes) have varied considerably, culminating in a 100-year low in the fall of 2020. In August 2020, the 10-year rate fell to 0.52%, its lowest level in the available history of 10-Year Treasury rates.

From December 1990 to early 2020, U.S. 30-year Treasury bond (T-bonds) yields ranged from a high of 8.26% in January 1990 to a low of 0.99% in March 2020.

Here are some factors that affect the yields.

Why Interest Rates and Yields Rise and Fall

Although investors traditionally hold bonds in their investment portfolios to counter the reputedly greater volatility of stocks (called hedging), both financial instruments are volatile, differing only in how their fluctuations correspond to the opposing market.

There are five factors recognized by the Federal Reserve (The Fed) that influence the interest rates of the shorter-term T-bills—which range in maturity up to 52 weeks—but all five factors contribute at least as much to the offered rates on longer-term Treasury notes and bonds, while also affecting yield. These factors are:

  • Economic conditions: Investor sentiment and confidence are influenced by economic factors, causing them to look at more stable investments.
  • Demand for risk-free securities: Demand rises when economic conditions force investors to look for returns outside of the stock market.
  • Supply of T-bills: When demand for T-bills fluctuates, so does the supply. The Fed can increase or reduce the supply as part of its monetary policy.
  • Monetary policy: The Fed uses monetary policy to control inflation or economic swings.
  • Inflation: An increase in prices, and a decrease in the purchasing value of currencies.

Although the Federal Reserve points out the effect these five factors have on short-term T-bills, they also affect longer-term rates and yields.

Economic conditions cause investors to purchase more bonds, causing the prices of bonds to rise, which negatively affect their yield.

Economic Conditions

It has been pointed out that as interest rates rise in bull markets, bond prices tend to fall. When rates begin to decline in bear markets, bond prices tend to rise. Bond prices and yield rise and fall opposite of each other.

The rise and fall of prices of the bonds are correlated to the age of the bonds in addition to demand. Bonds are issued with fixed rates, and investors are always looking for the highest returns. When new bonds are issued at higher rates, prices fall for existing bonds because the demand for new bonds increases. Conversely, when new issue bond rates are low, investors demand existing bonds that have higher rates.


Periods of financial uncertainty increase demand for financial instruments that are perceived to carry less risk—the U.S. government's debt instruments (T-bills and T-notes) are universally considered the safest in the world. As a result of increased demand for new or existing Treasuries, investors accept lower rates and yields, despite a possible decrease in year-over-year profit.

Monetary Policy

Bonds have more than one government function. In addition to raising money, bonds and their offered interest rates have an influence on the financial markets in general. The Fed doesn’t control long-term rates, but its policy with regard to short-term rates sets the basis for yields on government bonds with longer maturities. 

The Federal Reserve uses its monetary policy powers to influence rates and inflation.

After the financial crisis of 2007–2008, the Federal Reserve kept interest rates as low as possible in order to make it easier for businesses to borrow money. They lowered rates to levels suitable for economic growth, and combined rates with extravagant buybacks of government assets, in a policy known as quantitative easing. This policy was implemented around the world after the financial crisis.


Government bonds exist for the purpose of raising capital that the government may need for initiatives, payroll, or to service debt. When the U.S. government has a federal budget surplus (as it did in the period 1998–2000), it has less need for borrowed money and will issue fewer Treasury notes and bonds.


Actual inflation (but also inflation expectations in the financial community) tends to raise interest rates and elevate bond yields. The cause of the elevated yields of the late 1970s and early 1980s was the high inflation at that time, which led U.S. Federal Reserve Chairman Paul Volcker to begin raising short-term interest rates dramatically during the early 1980s.

Keep in mind that in periods of high inflation rates, the real yield (post inflation yield) investors receive is lower than it appears—as inflation rises, bond yields go down. Paul Volker's dramatic increase in rates resulted in higher yields of all Treasury instruments.