What Is a Treasury Bond Rate?

The Treasury bond rate refers to the rate of any of the United States Treasury bond issuance. There are several meanings to the term rate and several important benchmarks associated with Treasury rates.

Computing Treasury Rates

Treasury rates are computed using a bond formula (see Resources). The rate is determined as part of a Treasury auction, which occurs on a regularly scheduled quarterly cycle. The result of the auction is called the rate. Non-winning bids are published by the Treasury at the same time as the winning rate. Non-winning bids are called the auction "tail."

Treasury Bills, Notes and Bonds

A Treasury bill is any Treasury issuance up to one year in maturity. These auctions occur weekly. A Treasury note is any issuance up to 10 years in maturity. The benchmark Treasury note issues are the 2-year, 5-year, and 7-year and 10-year auctions. Treasury bond auctions refer specifically to the 30-year auctions.

Benchmark Auctions

The competitive rates available on certain auctions are called benchmark auctions. The rates produced at these auctions are used by traders to figure out what lesser-grade securities near the same maturity should trade for. For example, the 7-year note is similar to the average length of time a homeowner resides in their home. Thus, mortgage rates are directly determined by a spread or additional risk amount above the 7-year note rate. If the 7-year note is yielding 5 percent and the spread is 125, then the yield for the 30-year stated mortgage (with an expected 7-year average life) is 6.25 percent.

Bill Rates and Note Rates are Different.

There are different formulas used for Treasury bill rates and Treasury notes and bonds. This is because note and bond rates pay interest on a semiannual basis. Bills do not pay semiannual interest. Because their maturity is a year or less, they pay all earned interest at maturity. See Resources for calculators that compute Treasury rates.

Treasury Rates Change Throughout the Day

Only if a bond is issued at par (or 100) is the coupon rate the same as the interest rate of the bond, also known as the yield to maturity. Once fixed, a coupon does not change. The yield will change as the bond is traded over periods of high and low interest rates as well as overnight in foreign markets. The result is that the bond rate changes continuously as the bid and offer changes.

References

• Investopedia: Discussion of Yield and Bond Price
• CNN Money: Current Benchmark Rates

Resources

• This Matter: Nominal Interest Rates
• Investopedia: Bond Calculators