The first thing traders need to learn about treasury bonds, and most bonds for that matter, is that price and yield move inversely.
If investors are bearish, and sell bonds, we will see yields increasing.
This can happen because investors would prefer investing in stocks for a higher return.
Another possible reason is that the credit quality of the issuer has come into question and traders look for other bonds, with fewer questions on the issuer’s ability to pay interest.
Treasury bills are always sold as a ‘zero-coupon’ bond, which simply means that the bond is sold at a value of less than ‘par’ (the amount stated on the bill), commonly $1,000 per unit.
When the maturity comes due, the investor gets the full $1,000 to compensate for both the initial purchase price, and interest owed.
For example, if you buy a six-month Treasury bill at 97 today, you paid 97% of the par value of the bond.
That would mature at $1,000 in 6 months.
Therefore, you paid $970 today, and will receive $1,000 in six months, for a return of $30, or 3%. As this was only for six months, you would be looking at an annualized return rate of 6%, assuming no compounding.
Notes and Bonds differ from Bills in that they will generally carry a coupon (a fixed periodic payment of interest on the ‘par value’ of $1,000 per bond) based on prevailing market interest rates.
The Treasury will then announce the coupons ahead of the auction, and investors can decide how much they are willing to pay for the bond.
After the initial auction, Treasuries are traded in one of the most active secondary markets in the world, with investors around the globe buying and selling treasuries for speculation, investment, and safekeeping.
The secondary market for treasuries is where the rates for all of the above issues are decided. If markets are feeling pessimistic due to negative news, US treasuries and other safety assets rise in value.
If they’re feeling positive, risk assets will be in demand and safe haven assets like US treasuries will drop in value as investors seek greater returns.