[ELI5] what does the yield on the US bonds mean exactly and why is it a concern when they rise?
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The “yield” is basically the interest that bonds pay…you loan money to the government (if it’s a US bond) and they pay you back with interest. The “yield” is how much you’re going to make from the bond.
When it rises, it means two things:
1) It’s costing the US government more to borrow money. Since a not insignificant amount of taxes goes to pay interest on debt the US already has, rising bond yields means the US government’s debt is more expensive, so they’ll have to pay more for interest in the future, so they’ll have less left to do other stuff.
2) Bonds are in higher demand than they were before. That usually happens when people want to take their money *out* of somewhere else and stick it somewhere safe (bonds are very safe investments). So rising bond yields is a sign that people aren’t very confident that other investments are going to do well…like stocks…so it’s a sign of a weakening stock market.
US bonds are considered the safest investment because the US government isn’t going to default on its debt. The yield is the amount of interest they pay on a bond issued. When bond yields rise, that has lots of effects on investing markets and the economy. Higher cost to borrow makes it harder for the government to keep borrowing without exploding the national debt. Investors will flee other types of investments and other currencies. You’ll see money flow out of the stock market and into bonds when the guaranteed return is higher — an investor that would take their changes on the ups and downs of the stock market when the tradeoff is 8% return vs. 2% return might choose the safer option if the return is now 5%. And investors who have invested in other countries will want to buy the super safe American bonds if they’re now paying more, requiring that they sell Euros, Pounds, Yen, etc. to get the dollars they need.
The yield on a bond is the return you can expect from owning a bond. A bond is essentially a loan to the issuer, in this case the U.S. government. When the government sells a bond, it is agreeing to make interest payments to the holder of the bond until the bond expires (called maturity). The interest rate for the bond, called the coupon rate, is set when the bond is issued. At maturity, the government will pay the holder a specified amount, called the face value or par value of the bond, and will no longer make interest payments. A bond holder can usually sell a bond to another investor at any time before the bond matures.
Now, the relationship between interest rates, bond prices, and bond yields is counter-intuitive. When interest rates go up, it *lowers* the price someone can get for an existing bond, since buyers can get new bonds with higher rates. Along with this, if bond prices are falling, bond yields will go up, since you can get the same amount of return at a lower initial price.
Ultimately, higher bond yields make bonds more attractive as an investment, which can pull cash from other places like the stock market. This can have the effect of causing the stock market to fall which can have other negative effects on the financial markets and then the larger economy.
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