Beginner’s Guide to Market Volatility

Bond yields are at record lows — here's what that means for you

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There have been many record-breaking events in the stock market in recent years, with the major indexes hitting new highs and the longest running bull market in history. The coronavirus outbreak, however, and the resulting market turmoil has led to another first: The 10-year Treasury yield dropped below 0.5% for the first time ever to reach record lows.

The 10-year yield holds outsize importance in the U.S. economy as the Federal Reserve and banks use it as a benchmark for mortgage rates and auto loans. On Sunday, the 10-year Treasury rate hit an all-time low of 0.318%, down more than a full percentage point from mid-February. These are unprecedented levels: Even during the financial crisis, yields were between 3% and 4% and have stayed between 2% and 4% since.

Here's what you need to know about Treasury yields and how they can affect your finances.

Why yields are dropping

A yield is the total amount of money an investor earns by owning a bond over time, such as a Treasury. Yields and bond prices generally have an inverse relationship: When bond prices increase, yields decrease. Right now, bond prices are increasing as investors seek safer investments. That increased demand drives yields down and sends the signal that investors' outlooks for the world economy are worsening.

"People are selling stocks and trying to buy safety — not only here, but around the world,"  says Scott Colbert, chief economist at Commerce Trust Company in Missouri. "And the safest investment in the world is a 10-year Treasury," he says, because it is guaranteed by the federal government.

Another contributing factor to record-low yields is the Fed's surprise 50-basis point interest rate cut last week, which was an attempt to buoy the markets. Bond yields are closely associated with interest rates. As rates have dropped, yields have followed suit.

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Lower yields: Cheaper auto loans but challenges for investors

Lower yields can be a mixed bag. As a consumer, you'll likely see more attractive rates when it comes to borrowing money, especially to make a big purchase like a car. "Almost every domestic interest rate we have — for cars, homes, businesses, municipalities — is set off of the U.S. Treasury market," says Colbert. 

As an investor, though, lower bond yields mean that you won't see as much of a return on investments or earn as much interest on your savings account. Even so, it's important to remember that bonds do more in your portfolio than provide a yield: They play a critical role in diversifying your investment mix, acting as a cushion when the markets get rocky.

"The guidance for long-term investors remains intact — do not panic," says Greg McBride, chief financial analyst at Bankrate. "Long-term investors must think in terms of years or decades."

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