Factors That Affect U.S. Treasury Yields

$1000 denomination US Savings Bonds
••• richcano/E+/Getty Images

The bond market is often seen as a leading economic indicator. This is especially true of U.S. Treasury yields.

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

U.S. 30-year Treasury bonds (T-bonds) have also varied a great deal. T-bonds reached a high of 8.26% in January 1990. They hit a low of 0.99% in March 2020.

Here are some factors that affect yields.

Why Interest Rates and Yields Rise and Fall

Many investors hold bonds to counter the supposedly greater volatility of stocks. This is called hedging. But, both bonds and stocks are volatile. The difference between them lies in how their swings up and down relate to the market.

There are five factors recognized by the Federal Reserve (The Fed) that influence the interest rates of the shorter-term T-bills. But all five factors contribute at least as much to the 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. During a bear market, they look for 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 leads to a decrease in the purchasing power of currencies.

Economic conditions cause investors to buy more bonds. This makes the price of bonds rise, which negatively affects their yield.

Economic Conditions

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 in opposing ways. Yield is the rate of interest paid by the bond expressed, also known as its coupon.

The rise and fall of prices of the bonds are correlated to the age of the bonds, as well as demand. Bonds are issued with fixed rates. 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. But, when new issue bond rates are low, investors demand existing bonds that have higher rates. An important concept related to this definition is a bond's duration, or its price sensitivity to changes in interest rates; the longer the maturity of a bond the greater its duration.


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 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 financial markets. 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 Fed kept interest rates as low as possible in order to make it easier for businesses to borrow money. They lowered rates to levels that would support economic growth and combined rates with buybacks of government assets. This policy is known as quantitative easing. It was implemented around the world after the financial crisis.


Government bonds exist for the purpose of raising capital. The government can use this capital to fund initiatives, for payroll, or to service debt. When the U.S. government has a budget surplus (as it did between 1998 and 2000), it has less need for borrowed money. It will issue fewer Treasury notes and bonds.


Inflation tends to raise interest rates and bond yields. The cause of the high yields of the late 1970s and early 1980s was the high inflation at that time. This led U.S. Federal Reserve Chairman Paul Volcker to raise short-term interest rates during the early 1980s.

Keep in mind that in periods of high inflation rates, the real yield you 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.