are more closely watched than bond yields.

- There are forces in play that merit watching.

Some commodity prices

and 10-year treasury yields have climbed.

- [Presenter] That's the president of

The Federal Reserve of Atlanta last March

speaking about how The Fed gauges inflation

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

US government bond yields are a barometer for the economy,

but they're also more than that.

- US government bond yields are extremely important

to the US and even in the global economy.

Bond yields affect everything from the cost of a mortgage

to the cost of borrowing for businesses.

If you're borrowing money,

that's gonna be determined to a large extent

by US government bond yields.

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

Here's how bond yields work

and why they're so crucial to the economy.

(bright music)

When we talk about a bond yield,

we're typically talking about the annualized return

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

Let's break this down.

A bond is a contract with features that are set

from the start.

There's the maturity date,

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

This is generally two to 30 years.

Bonds that mature between two and 10 years

are also called notes.

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

the bond is worth when it's first created

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

There's also the annual interest rate,

otherwise known as the coupon rate.

This is the fixed amount a bond pays each year

up to its maturity date.

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

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

Every year, the investor will receive $40

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

she paid for the bond.

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

she can sell it to other investors

and when she does certain features of the bond

are subject to change.

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

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

bringing down the value of existing bonds.

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

Suddenly this bond is less attractive to investors

and the price has dropped.

When the price goes down, the yield goes up

and when interest rates go down,

this same dynamic happens in reverse.

The inverse relationship between the price of a bond

and it's yield is key to understanding

why investors care so much about bond yields

and why you sometimes see yields and stocks

both going up at the same time.

- Investors generally like bonds

because they are a safe investment.

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

much lower than stocks.

- [Presenter] Sam Goldfarb covers changes in bond yields

and how they're connected to financial markets

and the economy.

- If investors are confident about the economy,

they might not be satisfied with the small return

they can get from US government bonds.

They might choose to buy stocks instead.

- [Presenter] But climbing treasury yields also signal

that borrowing is getting more expensive.

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

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

where your mortgage rates are gonna be going,

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

- [Presenter] Bond yields aren't just watched

by economists and investors.

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

And they're not just watching.

Bond yields are a key part of monetary policy

that The Fed uses to help influence the economy.

- There has been an underlying sense

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

why rates would move back up from

the extraordinarily low levels they were at.

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

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

during the economic crisis.

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

at controls to zero in an effort to bolster the economy

and encourage spending.

And bond yields, which are heavily influenced by

the outlook of short-term interest rates

also fell to record lows.

Two years later, much of the economy has rebounded.

- The economy has rapidly gained strength despite

the ongoing pandemic, giving rise to persistent supply

and demand imbalances and bottlenecks

and to elevated inflation.

- [Presenter] Last December inflation rose 7%

from a year earlier.

The fastest pace since 1982.

This reflected rapidly rising prices

on everything from houses to groceries.

And when The Fed wants to restrain an overheated economy,

it raises short-term interest rates.

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

- If inflation is uncomfortably high,

people don't like that.

The Fed has a goal of keeping prices stable

and so it'll try to cool the economy

by raising borrowing costs.

- [Presenter] Higher interest rates can send up

the price of mortgages and other loans,

which will likely slow down consumer spending.

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

Higher bond yields can help cool down the economy,

which should bring down inflation in the longterm.