Treasury yields fell on weak economic data. What is the mechanism behind this? Does the lower treasury yield mean a higher treasury price, which in turn means a higher demand? Why a higher demand...

Treasury yields fell on weak economic data. What is the mechanism behind this? Does the lower treasury yield mean a higher treasury price, which in turn means a higher demand? Why a higher demand for US treasuries when the economy is weak? Thank you.

Asked on by raymondtin

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Karen P.L. Hardison | College Teacher | eNotes Employee

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Your questions relate to a complex aspect of macroeconomic theory. In brief, when economic data is weak, it is because the economy has weak, or low, income, spending, commodities prices for farmers, etc. In the simplest terms, investors lose confidence in the businesses and industries comprising the US economy to continue to provide dividends, to increase earnings and revenue or to grow in technology and employees. Let's focus the answer with two definitions, that for "economic data" and that for "Treasury yield."

Economic Data Defined: Economic data comprises facts and figures reported from many macroeconomic "accounts" spanning the public and private sectors and including the international sector. The facts and figures reported are analyzed to produced mathematical statistics describing activity in each account in each sector and in each sector. These economic statistics, called economic data, influence decisions on public policy (i.e., government monetary, budgetary and legislative decisions), decisions in business and industry, and decisions on spending and saving by private individuals. Some economic accounts, as reported by the US Department of Commerce Bureau of Economic Analysis--from which facts and figures are compiled and which produce statistics comprising "economic data"--are:

1. National Account

  • Gross Domestic Product (GDP), Personal Income and Outlays, Consumer Spending, Corporate Profits, Fixed Assets

2. International Account

  • Balance of Payments, Trade in Goods and Services

3. Industry Account

  • Quarterly GDP by Industry, Annual Industry Accounts (i.e., GDP by Industry plus Input-Output Accounts)

4. Supplemental Accounts

  • Health Care Satellite Account, Travel and Tourism Satellite Accounts


Treasury Yield Defined: "Treasury yield" is the interest the US government is willing to pay on debt obligations. Debt obligations are the repayment of money borrowed by the government in the debt market in the form of Treasury bonds, notes and bills, each having varying lengths of time before the repayment, or maturity, date. Treasury yield is the same as rate of return on investment (i.e., money invested as a loan to the government) and is expressed as a percentage of the debt obligation, or as a percentage of the final value of the Treasury bond, note or bill.

Treasury Yield and Weak Economic Data

Treasury yields--the amount the government is willing to pay to borrow money--fall on weak economic data because the macroeconomic mechanism is that weak economic data (as per above) means a weakened national economy reflecting lessened general income resulting in lessened internal tax revenue. A weakened national economy is reflected in macroeconomic aspects such as (a) lessened spending by consumers, possibly resulting from higher unemployment or higher inflation of the currency; (b) in a sell off of investment in the equity, or stock, markets; (c) in drops in agricultural commodities prices (e.g., oranges, pork bellies) correlating with a weakened agricultural market; (d) and in lack of growth or in instability in foreign markets, like China or the European Union.

Does the lower treasury yield mean a higher treasury price?

Treasury instrument (bonds, notes, bills) yield and price are indirectly, or inversely, related. This means that when one (yield or price) goes up, the other goes down. In other words, when treasury yields are low (or down), then treasury prices are high (or up). The reason for this is simple in nature, yet complex in detail because the answer relates to how investors react to (or shift demand in) weak economic data, and we have seen that economic data is a complex part of macroeconomics.

To reiterate what was said above, when economic data is weak, it is because the economy has weak, or low, income, spending, commodities prices for farmers, etc. In the simplest terms, investors lose confidence in the businesses and industries comprising the US economy to continue to provide dividends, to increase earnings and revenue or to grow in technology and employees. Because of this lack of confidence in the national economy, investors sell their equity market investments and demand to invest their money in safer, less volatile investment markets that are less subject to losses in investment value such as can occur in equity stock markets when, for example, companies report lower than expected quarterly earnings.

A safe investment for money drawn out from the stock market is the Treasury market, which is safe because backed by the "full faith and credit" of the US government. Even when yields are low--meaning the interest earned on money leant to the government is low--and the price is high, money and demand will flow from the stock market to the Treasury market during a weak economy (one with weak economic data) because of confidence in the safety of the investment and because the price of the Treasury investment over time will move no lower than (lose no more value than) the par value (the intrinsic value) of the Treasury instrument. This means that, while some investment money may be lost as the high price moves downward to the par value, the investor knows that the investment cannot lose more than the known par and that any loses resulting from a high price will be offset by the yield earned over the lifetime of the Treasury instrument (e.g., 20- and 30-year Treasuries). Compare this to the potential for volatile loss on investments left in the stock market during a weak economy.

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