November 30, 2022

Treasury Yield: why matters to the Forex market?

What is Treasury Yield and why matters to the Forex market?

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Treasury yield refers to the rate of return on the U.S. government’s debt obligations. In other words, the Treasury yield is the interest rate that the U.S. government pays to borrow money for different lengths of time. The bond price is the amount of money the bondholder pays for the bond.

A bond is an “IOU”, thus, a signed/written document acknowledging a debt and promise to pay it back. When an entity needs to borrow money, it issues bonds. A Treasury bond (T-bond) is one of the four fixed-interest U.S. government debt securities that the US  Department of the Treasury issues. Moreover, a T-bond has a maturity of more than 10 years.

Treasuries are a low-risk investment because of the full faith and credit ensured by the U.S. government. Investors that purchase these Treasuries lend the government money. The US government, in turn, makes interest payments to the holders of such Treasuries as compensation for the loan provided.

Treasury yields are the total amount of money an investor earns by owning U.S. Treasury notes or bonds. The bond price is the amount of money the bondholder pays for the bond. As bond prices increase, bond yields fall. They are inversely correlated.

The interest payment, known as coupon, represents the cost of borrowing to the government. Further, supply and demand for the treasury bonds determines the rate of return or yield.

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Treasury Yield and Forex

Inter-market relationships affect currency price action. Actually, treasury yields serve as an indicator of the strength of the US stock market, which, in turn, increases demand for the US dollar.

For example, rising yield is dollar bullish while falling yield is dollar bearish.

Sources: 1. Investopedia 2. K. Amadeo, (22.03.2018) “Treasury Yields, How They Work, and How They Affect the Economy”, www.thebalance.com, retrieved on 25.04.2018

PLEASE NOTE The information above is not investment advice.