0: - [Presenter] Few things in the economy

2: are more closely watched than bond yields.

5: - There are forces in play that merit watching.

8: Some commodity prices

9: and 10-year treasury yields have climbed.

11: - [Presenter] That's the president of

12: The Federal Reserve of Atlanta last March

15: speaking about how The Fed gauges inflation

18: and why it's keeping a close eye on certain bond yields.

22: US government bond yields are a barometer for the economy,

25: but they're also more than that.

27: - US government bond yields are extremely important

30: to the US and even in the global economy.

32: Bond yields affect everything from the cost of a mortgage

37: to the cost of borrowing for businesses.

39: If you're borrowing money,

41: that's gonna be determined to a large extent

43: by US government bond yields.

46: - [Presenter] And changes in yields can impact you.

48: Here's how bond yields work

50: and why they're so crucial to the economy.

52: (bright music)

57: When we talk about a bond yield,

58: we're typically talking about the annualized return

61: an investor earns by holding a bond until its maturity date.

65: Let's break this down.

66: A bond is a contract with features that are set

69: from the start.

70: There's the maturity date,

71: which refers to the length of the bond's life.

73: This is generally two to 30 years.

76: Bonds that mature between two and 10 years

78: are also called notes.

80: Then there's it's face value, which is the amount

83: the bond is worth when it's first created

85: and the amount it is guaranteed to pay on the maturity date.

88: There's also the annual interest rate,

90: otherwise known as the coupon rate.

92: This is the fixed amount a bond pays each year

95: up to its maturity date.

96: So say an investor buys a new 10-year treasury note

100: with a face value of $1,000 and a coupon or yield of 4%.

105: Every year, the investor will receive $40

109: and on the 10th year, she'll get back the original $1,000

112: she paid for the bond.

114: But here's the thing, as soon as she buys that bond,

117: she can sell it to other investors

119: and when she does certain features of the bond

122: are subject to change.

124: If the economy is doing well, interest rates may go up,

127: which means new bonds will be issued at a higher yield,

130: bringing down the value of existing bonds.

133: Say a new batch of 10 year treasuries pay a yield of 5%.

137: Suddenly this bond is less attractive to investors

141: and the price has dropped.

142: When the price goes down, the yield goes up

145: and when interest rates go down,

146: this same dynamic happens in reverse.

149: The inverse relationship between the price of a bond

152: and it's yield is key to understanding

154: why investors care so much about bond yields

157: and why you sometimes see yields and stocks

160: both going up at the same time.

162: - Investors generally like bonds

164: because they are a safe investment.

166: The problem is that that return is gonna be often lower,

169: much lower than stocks.

171: - [Presenter] Sam Goldfarb covers changes in bond yields

173: and how they're connected to financial markets

175: and the economy.

177: - If investors are confident about the economy,

179: they might not be satisfied with the small return

182: they can get from US government bonds.

184: They might choose to buy stocks instead.

186: - [Presenter] But climbing treasury yields also signal

189: that borrowing is getting more expensive.

191: - It's basically a proxy for longer-term interest rates.

195: If you want to get a rough sense of, you know,

198: where your mortgage rates are gonna be going,

200: you might look at the 10-year treasury note and it's yield.

203: - [Presenter] Bond yields aren't just watched

204: by economists and investors.

206: The Federal reserve keeps a close eye on them as well.

209: And they're not just watching.

211: Bond yields are a key part of monetary policy

214: that The Fed uses to help influence the economy.

217: - There has been an underlying sense

219: of an improved economic outlook, and that has to be part of

222: why rates would move back up from

224: the extraordinarily low levels they were at.

227: - [Presenter] That's the chairman of The Federal reserve

229: in March, 2021, talking about the rise in bond yields

232: during the economic crisis.

234: In 2020, The Fed had slashed short-term interest rates

237: at controls to zero in an effort to bolster the economy

240: and encourage spending.

242: And bond yields, which are heavily influenced by

244: the outlook of short-term interest rates

246: also fell to record lows.

249: Two years later, much of the economy has rebounded.

252: - The economy has rapidly gained strength despite

255: the ongoing pandemic, giving rise to persistent supply

258: and demand imbalances and bottlenecks

261: and to elevated inflation.

263: - [Presenter] Last December inflation rose 7%

266: from a year earlier.

267: The fastest pace since 1982.

270: This reflected rapidly rising prices

272: on everything from houses to groceries.

274: And when The Fed wants to restrain an overheated economy,

278: it raises short-term interest rates.

280: And when interest rates rise, bond yields go up as well.

284: - If inflation is uncomfortably high,

286: people don't like that.

287: The Fed has a goal of keeping prices stable

291: and so it'll try to cool the economy

293: by raising borrowing costs.

296: - [Presenter] Higher interest rates can send up

298: the price of mortgages and other loans,

300: which will likely slow down consumer spending.

303: This sounds like a bad thing, but only to a point.

306: Higher bond yields can help cool down the economy,

309: which should bring down inflation in the longterm.