Treasury bond rates are the interest rates that the U.S. Treasury Department (Treasury) pays on securities issued to bondholders for the use of their money. The Treasury issues bills, notes, and bonds, but the public typically refers to all three Treasury securities collectively as “Treasury bonds". Interest rates for bonds are set at weekly Treasury auctions, and are determined by the price large financial institutions are willing to pay for the bonds through competitive bidding.
The U.S. sells bonds to the public to finance the operation of the government. Treasury bonds can be purchased by individuals as well as foreign or domestic entities. Many foreign governments use their national budget surpluses to buy Treasury bonds as an investment. The U.S. national debt is, in fact, the total amount that the government owes to outstanding bondholders, plus the money the government must reimburse certain national accounts, such as Social Security, from which the government has borrowed funds.
A bond is a loan of money in exchange for a guaranteed stream of interest payment over the course of the loan term and the return of the principal amount of the loan on the loan’s due date. Treasury bills, notes, and bonds differ in the length of time it takes for the loan made under each to become due. Bonds are considered one of the safest investment vehicles because the interest and repayment are backed by the full faith and credit of the U.S. government, an entity considered highly unlikely to default on its obligations. Treasury bond rates, reflective of one of the safest possible investments, benchmark the interest rates of other debt securities.
The Treasury sets a face, or par, value and an interest rate for bonds and sells them to financial institutions at auction. These financial institutions determine how much they are willing to pay for the bonds based on their estimation of the present value of the future payments of interest and principal guaranteed by the government, taking into account inflation and the possibility that interest rates will go up or down in the future. The final price paid by the highest bidder for the bond will either be less or more than the face value, reflecting if the bond was purchased at a discount or at a premium.
Treasury bond rates and yields on bonds are the baseline factors for setting interest rates domestically, and are also very influential in setting international interest rates. In the U.S., all other types of bonds and debt securities benchmark their interest rates based on Treasury bond rates. Any debt security or bond offered by a corporation or other private entity that is considered a higher risk than government-issued Treasury bonds must offer a higher interest rate or yield than comparably termed Treasury securities.