30 years treasury bonds

date: 2023-04-06

30 years treasury bonds is a very useful investment tool. but it's counterintuitive because of usually bonds return rate is low at 3%-5%, but long term bonds not, cause of the face value, coupon rate, bond price math magic, the yield decrease 1%, and the bond price will increase near 30%.

The calulation is simple, here is a example case:

Treasury issused a bond face valuse is $100,000, Coupon reate is 3%
Investors auction the bond, a guy named GUY1, bid highest price $101,000, so GUY1 get this bond.
now this bond yield can be calculated as:
- maturity= (100000*3%)*30 +100000 =190000.0 ,return 3% per year, and return principal at 30rd year. GUY1 will get $3000 per year, and 100k at 30rd year.
- yield=($3,000 + (($100,000 - $101,000) / 30)) / (($100,000 + $101,000) / 2) =0.019712 or 1.97%, Yield = (Annual coupon payment + ((Face value - Purchase price) / Years to maturity)) / ((Face value + Purchase price) / 2)
And Guy1 now can sell this bond to others at market.
if Guy2 buy at $102,000, the price increase = (102000-101000)/101000 = 0.0099 =0.99%
now yield =($3,000 + (($100,000 - $102,000) / 30)) / (($100,000 + $102,000) / 2) =0.019426=1.9426%
so yield decrease 0.0286% and price increase 0.99%
so price increase rate is about 30 times as yield rate.

this is the power of long term bonds math, if we expect interest rate will decrease 1%, we will get 30% return of our invest.

who buy bonds

Because of safety and security of US treasury bonds, there is widly investors buy it, roughly proportion is:

Foreign investors 29%
Pension funds, insurances, and other professional institutions, 40%
Federal Reserve, individual 31%

how they buy bonds

1. Participating in a Treasury auction
2. Trading with others at online market
3. stock ETF, like ZROZ, TLT, EDV

basic principle:

bonds demands ↑ increase -> price up-> yield down
bonds demands ↓ decrease -> price down-> yield up

so all origin driving force is demands of market. what will influce market demands?

what will influence bonds demands?

generally:

1. Interest reates, (federal fund rate ↑, short term rate ↑, long-term bonds demand ↓, long-term bonds price ↓, long-term bonds yield ↑)
2. Inflation expectations, (inflation ↑, federal fund rate ↑,...bonds yield ↑)
3. Economic , (economic hot, inflation ↑, ...bonds yield ↑)
4. Geopolitical events, (tough time ↑ , long-term bonds demand ↑, long-term bonds price ↑, long-term bonds yield↓)

but, need to be metioned, market is complicated, not single dimensional, you should carefully consider the relations, likes when Ukriane-russian war started, yields not goes down but goes up, because its is in high inflation time, and the war make infation more worst.

what will long-term bonds directly impact

mortgate rates