If you pay $114.31, and then you get $3.75 per year for 10 years, and $100 at the end of 10 years, your yield is 2.13%. That is, if you plug those numbers into a spreadsheet, and discount it at 2.13% per year, you will get back $114.31.

If some investor bought the bond for $99.73 on 11/17/08 and later sold it for $114.31, he could put the difference ($14.58) and put it in his pocket as a capital gain. That’s what I meant when I said that changes in prices (and yields) of existing Treasury bonds don’t affect the Treasury Department, except insofar as they show the cost of money for Treasury when it issues new bonds.

Please explain

To Tyler’s question: Fannie and Freddie are in a government conservatorship, which means that the government is running them. But they have not been absorbed into the Treasury department, so their debt is not equivalent to Treasuries.

The TED spread is a different beast – it is the spread between t-bills and Libor (the “ED” comes from the symbol for eurodollar futures on the CME, which track the Libor) The Libor is the interest rate paid on dollar deposits by non-U.S. banks (Hence the name: “London inter-bank offered rate”) For a primer on Eurodollars, go here: http://wfhummel.net/eurodollars.html The Libor is a dollar interest rate that is of the exact same duration as a T-bill, but that is not guaranteed by the govt. Thus, the spread between the 2 rates is a measure of the “fear factor” in the markets.

As to the main post: good overall, but you miss the main determinant of T-note yeilds: it’s not inflationary espectations, etc, but simply projections about what the Fed will do. Since the U.S. is a sovereign currency issuer, it (through it’s central bank) can set interest rates on it’s debt at any level it chooses (in point of fact, the only real purpose for a currency issuer to sell debt is to support non-zero interest rates) Thus, since in our current arrangment the Fed closely controls short term rates while allowing long rates to float, longer rates must necessarily be set by expectations about future Fed action. If the Fed set the FF rate at 1% and announced it’s intention to keep it there for 30 years, long term rates would have to come down. See: http://www.moslereconomics.com/mandatory-readings/the-natural-rate-of-interest-is-zero/

Bills, by definition, have no coupon. They are issued at a discount and mature at par, the differnce is considered “interest.” Therefore, a note or a bond could never be considered a bill, since notes and bonds pay regular coupon interest payments.

You, Simon, and Peter are to be commended. You have provided a great service for the public with this website.

The difference between bills, notes and bonds are the length until maturity:

Treasury bills are issued for terms less than a year.
Treasury notes are issued in terms of 2, 3, 5, and 10 years.
Treasury bonds are issued in terms of 30 years, and have just recently been reintroduced in February 2006.
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Probably, bonds with maturity of 29.x are considered as “bonds”.
Anyway, thank you for your great posting, Mr.Kwak.