The yields on U.S. Treasury instruments, notably 10-year Treasury bonds, are considered to be an important measuring stick for market confidence and investor appetites. This is because government bonds carry almost zero risk to principle, so all other security investments are forced to add a risk premium to entice savers. When the yield on Treasury bonds moves, all other investments tend to move in kind.
Understanding Treasury Yields
As a debt instrument, a Treasury bond’s yield has an inverse relationship with its price. When there is greater demand for bonds, the price is bid up and the return — based on the coupon rate for Treasury bonds — is relatively lower compared to the higher price.
Investors are most likely to demand low-risk Treasury bonds when times are uncertain. This is because they are protected against absolute market loss. This causes yields to drop, which is traditionally a sign of economic weakness, and it tends to lower the return that other security issuers offer.