As of October 16, 2024, the yield for a ten-year U.S. government bond was 4.04 percent, while the yield for a two-year bond was 3.96 percent. This represents an inverted yield curve, whereby bonds of longer maturities provide a lower yield, reflecting investors' expectations for a decline in long-term interest rates. Hence, making long-term debt holders open to more risk under the uncertainty around the condition of financial markets in the future. That markets are uncertain can be seen by considering both the short-term fluctuations, and the long-term downward trend, of the yields of U.S. government bonds from 2006 to 2021, before the treasury yield curve increased again significantly in 2022 and 2023. What are government bonds? Government bonds, otherwise called ‘sovereign’ or ‘treasury’ bonds, are financial instruments used by governments to raise money for government spending. Investors give the government a certain amount of money (the ‘face value’), to be repaid at a specified time in the future (the ‘maturity date’). In addition, the government makes regular periodic interest payments (called ‘coupon payments’). Once initially issued, government bonds are tradable on financial markets, meaning their value can fluctuate over time (even though the underlying face value and coupon payments remain the same). Investors are attracted to government bonds as, provided the country in question has a stable economy and political system, they are a very safe investment. Accordingly, in periods of economic turmoil, investors may be willing to accept a negative overall return in order to have a safe haven for their money. For example, once the market value is compared to the total received from remaining interest payments and the face value, investors have been willing to accept a negative return on two-year German government bonds between 2014 and 2021. Conversely, if the underlying economy and political structures are weak, investors demand a higher return to compensate for the higher risk they take on. Consequently, the return on bonds in emerging markets like Brazil are consistently higher than that of the United States (and other developed economies). Inverted yield curves When investors are worried about the financial future, it can lead to what is called an ‘inverted yield curve’. An inverted yield curve is where investors pay more for short term bonds than long term, indicating they do not have confidence in long-term financial conditions. Historically, the yield curve has historically inverted before each of the last five U.S. recessions. The last U.S. yield curve inversion occurred at several brief points in 2019 – a trend which continued until the Federal Reserve cut interest rates several times over that year. However, the ultimate trigger for the next recession was the unpredicted, exogenous shock of the global coronavirus (COVID-19) pandemic, showing how such informal indicators may be grounded just as much in coincidence as causation.

After to as low as low as 0.55 percent in July 2020, in the wake of the coronavirus outbreak, the yield on 10-year U.S treasury bonds increased considerably. As of June 2024, it reached 4.36 percent.

At the end of 2023, the yield on the 10-year U.S. Treasury bond was 3.96 percent. The highest yields could be observed in the early 1990s. What affects bond prices? The factors that play a big role in valuation and interest in government bonds are interest rate and inflation. If inflation is expected to be high, investors will demand a higher return on bonds. Country credit ratings indicate how stable the economy is and thus also influence the government bond prices. Risk and bonds Finally, when investors are worried about the bond issuer’s ability to pay at the end of the term, they demand a higher interest rate. For the U.S. Treasury, the vast majority of investors consider the investment to be perfectly safe. Ten-year government bonds from other countries show that countries seen as more risky have a higher bond return. On the other hand, countries in which investors do not expect economic growth have a lower yield.

In December 2024, the yield on a 10-year U.S. Treasury note was 4.39 percent, forecasted to decrease to reach 3.27 percent by August 2025. Treasury securities are debt instruments used by the government to finance the national debt. Who owns treasury notes? Because the U.S. treasury notes are generally assumed to be a risk-free investment, they are often used by large financial institutions as collateral. Because of this, billions of dollars in treasury securities are traded daily. Other countries also hold U.S. treasury securities, as do U.S. households. Investors and institutions accept the relatively low interest rate because the U.S. Treasury guarantees the investment. Looking into the future Because these notes are so commonly traded, their interest rate also serves as a signal about the market’s expectations of future growth. When markets expect the economy to grow, forecasts for treasury notes will reflect that in a higher interest rate. In fact, one harbinger of recession is an inverted yield curve, when the return on 3-month treasury bills is higher than the ten year rate. While this does not always lead to a recession, it certainly signals pessimism from financial markets.

As of December 30, 2024, the major economy with the highest yield on 10-year government bonds was Turkey, with a yield of 27.38 percent. This is due to the risks investors take when investing in Turkey, notably due to high inflation rates potentially eradicating any profits made when using a foreign currency to investing in securities denominated in Turkish lira. Of the major developed economies, United States had one the highest yield on 10-year government bonds at this time with 4.59 percent, while Switzerland had the lowest at 0.27 percent. How does inflation influence the yields of government bonds? Inflation reduces purchasing power over time. Due to this, investors seek higher returns to offset the anticipated decrease in purchasing power resulting from rapid price rises. In countries with high inflation, government bond yields often incorporate investor expectations and risk premiums, resulting in comparatively higher rates offered by these bonds. Why are government bond rates significant? Government bond rates are an important indicator of financial markets, serving as a benchmark for borrowing costs, interest rates, and investor sentiment. They affect the cost of government borrowing, influence the price of various financial instruments, and serve as a reflection of expectations regarding inflation and economic growth. For instance, in financial analysis and investing, people often use the 10-year U.S. government bond rates as a proxy for the longer-term risk-free rate.

The yield on two year U.S. treasury bonds started increasing since 2021, reaching a new peak of 5.08 percent in October 2023. This comes after the yields for two-year treasury bonds plummeted down to less than 0.2 for much of 2020 owing to the global coronavirus (COVID-19) pandemic.

In 2023, the yield on 10-year U.S. treasury securities increased to 3.96 percent, up from 2.95 percent in the previous year. 2020 recorded the lowest value in the period under consideration, and well below the longer-term average. In 1980 the yield was 11.43 percent. What are treasury securities? The United States government consistently has a budget deficit, and it finances this spending with debt issued by the Treasury Department. These treasury securities are attractive investments because most investors believe that the United States Treasury Department will never default. For this reason, many investors of different varieties hold these securities. Country differences The markets consider treasury securities to be low-risk, as they are secured by governments. Different countries differ in level of indebtment, value of investments, stability of currency, GDP growth, inflation, etc. These factors are the reasons why yields on government bonds differ from country to country. The yield shows how much a given government has to pay to the investors for the money that it borrows.

The Bond Market Report is Segmented by Type (Treasury Bonds, Municipal Bonds, Corporate Bonds, High-Yield Bonds, Mortgage-Backed Securities, and Others (Floating Rate Bonds, Zero-Coupon Bonds, Callable Bonds)), by Issuer (Public Sector Issuers and Private Sector Issuers), by Sectors (Government Backed Entities, Financial Corporations, Non-Financial Corporations, Others (Development Banks, and Local Government)), and by Geography (North America, South America, Europe, Asia-Pacific, and Middle-East & Africa). The Report Offers Market Size and Forecasts for the Bonds Market in Value (USD) for all the Above Segments.

At the end of 2024, the yield for a 30-year U.S. Treasury bond was 4.78 percent, slightly higher than the yields for bonds with short-term maturities. Bonds of longer maturities generally have higher yields as a reward for the uncertainty about the condition of financial markets in the future.

In August 2024, the average yield on ten-year government bonds in the United States was equal to 3.87 percent. This was the highest of the selected developed economies considered in this statistic. The countries with the lowest yield were Germany and Japan, with 2.24 and 0.88 percent respectively. Bonds and yields – additional information The bond yield indicates the level of return that the investor can expect from a given type of bond. The government of Italy, for instance, offered the investors 3.63 percent yield on ten-year government bonds for borrowing their money in August 2024. In the United States, government needs are also financed by selling various debt instruments such as Treasury bills, notes, bonds and savings bonds to investors. The largest holders of U.S. debt are Federal Reserve and Government accounts in the United States. The major foreign holders of the United States treasury securities are Japan, Mainland China, and the United Kingdom.

The average rates for U.S. government three-month Treasury bills on the secondary marekt fluctuated significantly from 1970 to 2023 while decreasing overall. In 2023, the average rate for a three-month U.S. Treasury bill was five percent.

In January 2020, prior to the onset of the global coronavirus (COVID-19) pandemic, three of the seven largest economies by GDP had negative yields for two-year government bonds (Japan, Germany and France). With the onset of the pandemic, two-year bond yields in these countries actually rose slightly - in contrast to the other major economies, where yields fell over this period. As of December 2024, yields for two-year government bonds exhibited fluctuations across all countries. Notably, Japan showed a slight upward trend, while China experienced a modest decline.Negative yields assume that investors lack confidence in economic growth, meaning many investments (such as stocks) may lose value. Therefore, it is preferable to take a small loss on government debt that carries almost no risk to the investor, than risk a larger loss on other investments. As both the yen and euro are considered very safe assets, Japanese, German and French bonds were already being held by many investors prior to the pandemic as a hedge against economic downturn. Therefore, with the announcement of fiscal responses to the pandemic by many governments around March 2020, the value of these assets rose as confidence increased (slightly) that the worst case may be avoided. At the same time, yields on bonds with a higher return fell, as investors sought out investments with a higher return that were still considered safe.

The average market yield on the United States Treasury's 10-year bond was 2.13 percent during the second quarter of 2024. This rate was adjusted to reflect a constant maturity and also indexed to inflation, giving an idea of real returns for longer-term investments. The recent expected return was highest at the end of the end of the last quarter of 2024, and lowest in the second half of 2021, when it was negative.

The spread between 10-year and two-year U.S. Treasury bond yields reached a positive value of 0.1 percent in November 2024. The 10-year minus two-year Treasury bond spread is generally considered to be an advance warning of severe weakness in the stock market. Negative spreads occurred prior to the recession of the early 1990s, the tech-bubble crash in 2000-2001, and the financial crisis of 2007-2008.

Of the largest economies by GDP, the United States saw the sharpest fall in absolute terms for 10-year government bond yields due to the coronavirus (COVID-19) pandemic. From a level of 1.51 percent in January 2020, yields on 10-year government bonds fell to 0.65 percent by April 2020, and had further fallen to 0.53 percent by July 2020 before starting to recover towards the end of the year. Conversely, countries that went into 2020 with already low bond yields like Japan, Germany and France actually saw a small increase in March 2020 - although these already low yields mean that these small changes are significant in relative terms. As of December 2024, the countries with the highest 10-year yields are the United Kingdom, the United States and Australia with 4.66, 4.54 and 4.46 percent, respectively.

‘System cash position’ is an estimate of the change in the aggregate level of Exchange Settlement (ES) balances at the RBA, prior to the RBA’s open market operations on that day. A negative value indicates a projected fall in the level of ES balances, while a positive value indicates a projected rise. The estimate is based on information about settlements arising from transactions by the RBA’s clients, including the Australian Government, as well as the RBA’s own transactions, and is announced at 9:30 am each trading day.

‘Outright transactions’ is the cash value of purchases and sales, conducted as part of the Bank’s open market operations, of securities issued by the Australian Government and State and Territory central borrowing authorities with remaining terms to maturity up to around 18 months. A positive value indicates the RBA has purchased securities while a negative value indicates the RBA has sold securities.

‘Foreign exchange swaps’ is the aggregate value of the first leg of foreign exchange swaps transacted for same-day value specifically for domestic liquidity management purposes. A positive value indicates the RBA has sold Australian dollars for foreign currency while a negative value indicates the RBA has purchased Australian dollars. The value of the second leg of a foreign exchange swap is captured in the ‘System cash position’ on the unwind date.

‘Repurchase agreements (RPs)’ is the amount of the first leg of securities bought/sold by the RBA under repurchase agreement (RP). 'General Collateral' refers to eligible eligible securities issued by the Australian Government, State and Territory governments, supranational institutions, foreign governments and government agencies as well as eligible securities with a sovereign government guarantee. ‘Private securities’ covers all other eligible collateral, including ADI-issued securities (eligible bank-issued discount securities and certificates of deposit with 12 months or less to maturity and bonds issued by ADIs), asset-backed securities (eligible residential mortgage-backed securities and asset-backed commercial paper) and eligible commercial paper. A positive value indicates the RBA has purchased securities under RPs while a negative value indicates the RBA has sold securities under RPs. It does not include RPs which are transacted through the RBA’s overnight RP facility. The value of the second leg of all RPs is captured in the ‘System cash position’ on the respective value dates.

‘Exchange Settlement account balances (end day)’ is the aggregate of all ES balances held at the RBA at the close of business. Unexpected movements in ES balances and overnight RPs transacted through the RBA’s overnight RP facility mean that ‘Exchange Settlement account balances (end day)’ will not necessarily be the sum of the previous day’s ‘Exchange Settlement account balances (end day)’, the ‘System cash position’ and the total of ‘Open market operations’ transacted.

‘Overnight repurchase agreements with RBA’ is the aggregate of the first leg of securities bought by the RBA through the overnight RP facility. These data are updated with a one month lag.

Outright Transaction Details

The 'Outright Transactions Details' sheet provides further information on the outright purchases and sales of Bonds and Discount Securities issued by the Australian Commonwealth, State & Territory Governments, conducted as part of the Bank's open market operations. “Issuer” is the acronym of the issuer of the bond/security. A positive “Face value dealt” indicates a purchase while a negative value indicates a sale. 'Weighted average rate' is the average of the rates dealt for each bond/security, weighted by the amount transacted. 'Cut-off rate' is the lowest yield accepted.

Repo Details

The Repo Details sheets provide a summary of the type of securities delivered to/by the RBA under RP at each term dealt through the open market operations. 'Govt and Quasi-Govt Repo Details' covers repo against General Collateral (eligible securities issued by the Australian Government, State and Territory governments, supranational institutions, foreign governments and government agencies as well as eligible securities with a sovereign government guarantee). ‘Private securities’ covers all other eligible collateral, including ADI-issued securities (eligible bank-issued discount securities and certificates of deposit with 12 months or less to maturity and bonds issued by ADIs), asset-backed securities (eligible residential mortgage-backed securities and asset-backed commercial paper) and eligible commercial paper.

'Term' is the number of days dealt in open market operations.

'Value Dealt' is the amount of the first leg of securities bought/sold by the RBA under RP.

Weighted average rate' is the is the average of the rates on RPs dealt by the RBA through open market operations, weighted by the amount transacted.

'Cut-off rate' is the lowest rate dealt by the RBA through open market operations for each term dealt.

Repo Unwinds

The Repos Unwinds sheet provides a summary of the value of repurchase agreements due to unwind in the future, for both General Collateral and Private Securities. The unwind amount is equal to the sum of the total value dealt to that date plus accrued interest.

U.S. ten-year government bonds have provided significantly higher yields compared to German ten-year bonds since 2008, with the former yielding 4.36 percent in November 2024 compared to 2.31 percent for the latter. Being safe but low-return investments, treasury bond yields are generally considered an indicator of investor confidence about the economy. A rising yield indicates falling rates and falling demand, meaning that investors prefer to invest in higher-risk, higher-reward investments; a falling yield suggests the opposite.

In 2018, the average total volume of treasury securities traded per day was over 547 billion U.S. dollars. This means that every day the market was open, the average amount of U.S. government securities bought and sold amounted to half a trillion U.S. dollars in that year.

What are treasury securities?

Treasury securities are U.S. government debt, bonds sold to finance the United States government. Since the United States is seen as a guaranteed investment, these bonds are often used by large financial firms as collateral. The yield on a Treasury bond is minimal, but these institutions often do not hold them until maturity, instead trading them on secondary market.

Other options

The federal funds rate is the rate the Federal Reserve charges banks for overnight loans. Other assets, such as mortgaged backed securities, can also be used like treasury securities. Mortgage backed securities are bundles of home loans packaged together. Such bundling makes the overall security safer, unless there is a systemic shock to the housing market which would undermine the entire package.

As of November 2024, Luxembourg government bonds with maturities of close to ten years reached an average of 2.31 percent per annum. That was almost 0.8 percent less than the previous year. Treasury notes: a safe haven in times of trouble Ten-year government bonds, otherwise known as treasury notes, are debt obligations issued by a government which matures in ten years. They are considered a low-risk investment as they are backed by the government and their ability to raise taxes to cover its obligations. In August 2019, investors became more interested in these investments as global developments sparked uncertainty on the stock markets. Traditionally, government bonds from the U.S. and Germany have the highest liquidity. When stock exchanges fall with around ten percent, a German treasury note with an interest rate of around 2.43 percent is then considered a relatively safe place. What are other options to do with your money in Luxembourg? In March 2023, the interest rate of short-term household deposits (with an agreed maturity of up to one year) in Luxembourg was 2.35. This was the lowest of all Benelux countries (Belgium, Luxembourg and the Netherlands). Low interest rates on consumer savings are deemed a consequence of the monetary policy of the European Central Bank (ECB), as it maintains artificially low interest rates to increase inflation on the European continent. Low interest rates and uncertainty on the stock exchange might therefore explain investors’ interest in gold. The international price of gold per troy ounce has increased sharply in recent years.

As of December 30, 2024, 14 economies reported a negative value for their ten year minus two year government bond yield spread: Ukraine with a negative spread of 1,370 percent; Turkey, with a negative spread of 1332 percent; Nigeria with -350 percent; and Russia with -273 percent. At this time, almost all long-term debt for major economies was generating positive yields, with only the most stable European countries seeing smaller values. Why is an inverted yield curve important? Often called an inverted yield curve or negative yield curve, a situation where short term debt has a higher yield than long term debt is considered a main indicator of an impending recession. Essentially, this situation reflects an underlying belief among a majority of investors that short term interest rates are about to fall, with the lowering of interest rates being the orthodox fiscal response to a recession. Therefore, investors purchase safe government debt at today's higher interest rate, driving down the yield on long term debt. In the United States, an inverted yield curve for an extended period preceded (almost) all recent recessions. The exception to this is the economic downturn caused by the coronavirus (COVID-19) pandemic – however, the U.S. ten minus two year spread still came very close to negative territory in mid-2019. Bond yields and the coronavirus pandemic The onset of the coronavirus saw stock markets around the world crash in March 2020. This had an effect on bond markets, with the yield of both long term government debt and short term government debt falling dramatically at this time – reaching negative territory in many countries. With stock values collapsing, many investors placed their money in government debt – which guarantees both a regular interest payment and stable underlying value - in contrast to falling share prices. This led to many investors paying an amount for bonds on the market that was higher than the overall return for the duration of the bond (which is what is signified by a negative yield). However, the calculus is that the small loss taken on stable bonds is less that the losses likely to occur on the market. Moreover, if conditions continue to deteriorate, the bonds may be sold on at an even higher price, partly offsetting the losses from the negative yield.