The Effect on Treasury Bonds When the Interest Rate Is Raised

The U.S. Treasury issues bonds.

Department of Treasury Building image by dwight9592 from Fotolia.com

Treasury bonds are widely considered to be one of the most reliable, albeit slow-growing, forms of investment today. Essentially, the role of a treasury bond is to provide funding for the domestic government in exchange for a low-yield return over time. A particularly interesting element of treasury bonds is the fact that these investment vehicles featured a locked-in interest rate at the time the coupon is purchased. That being said, there are a number of factors that can influence the current rate at which the coupon can be purchased.

Understanding Interest Rates

When an individual purchases a treasury bond, they agree to purchase a coupon with a specific, fixed interest rate that matures over a designated period of time. The interest rate for these treasury bonds will change often depending upon a variety of economic factors. For example, supply and demand for bonds, current economic conditions and the general perception of the risk associated with holding these bonds will affect the specific interest rate at which you can purchase these coupons. Once the coupon has been purchased, the interest rate associated with that coupon will not change. That being said, additional coupons can be purchased at any time which feature different interest rates.

Rate Stability

Once a treasury bond has been purchased, it is important to note that the particular details related to this coupon cannot fluctuate. Even if a better interest rate emerges soon after you buy your coupon, it is not possible trade in your coupon for another. With that in mind, it could be argued that there is little to no effect on treasury bonds you hold when the interest rate is raised. When interest rates rise, however, it is a natural consequence that the existing value of your older bond will decrease due in part to the fact that no one will want to buy your treasury bond from you if they can receive a better interest rate elsewhere.

Ultimately, the most important element you should consider regarding your decision to buy treasury bonds is the following: do you think interest rates will rise in the short term, and, if they do, will you choose to purchase treasury bonds at that point as opposed to the current moment? As always, taking the time to do your own research will ensure that you have all of the information you need to make an informed decision about your short and long-term investments.

Photo Credits

  • Department of Treasury Building image by dwight9592 from Fotolia.com

About the Author

Ryan Cockerham has written for various websites since 2006, focusing on a variety of subjects ranging from music history and technology to photography and fashion. He received his Bachelor of Music from the University of Arkansas and is pursuing a Master of Music in music technology from New York University.


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