query: Do high interest rates lead to higher bond yields or lower?

positive: "It is important to distinguish between cause and effect as well as the supply (saving) versus demand (borrowing) side of money to understand the relationship between interest rates, bond yields, and inflation. What is mean by ""interest rates"" is usually based on the officially published rates determined by the central bank and is referenced to the overnight lending rate for meeting reserve requirements.  In practice, what the means is, (for example) in the United States the Federal Reserve will have periodic meetings to determine whether to leave this rate alone or to raise or lower the rate.  The new rate is generally determined by their assessment of current and forecast national and global economic conditions and factors in the votes of the various Regional Federal Reserve Presidents.  If the Fed anticipates economic weakness they will tend to lower and keep rates lower, while when the economy seems to be overheated the tendency will be to raise rates. Bond yields are also based on the expectation of future economic conditions, but as determined by market participants.  At times the market will actually ""lead"" the Fed in bidding bond prices up or down, while at other times it will react after the Fed does.  However, ignoring the varying time lag the two generally will track each other because they are really the same thing.  The only difference is the participants which are collectively determining what the rates/yields are. The inverse relationship between interest rates and inflation is the main reason for fluctuating rates in the first place.  The Fed will tend to raise rates to try to slow inflation, and lower rates when it feels inflation is too low and economic growth should be stimulated.  Likewise, when the economy is doing poorly there is both little inflationary pressure (driving interest rates down both in terms of what savers can accept to keep ahead of inflation and at) and depressed levels of borrowing (reduced demand for money, driving down rates to try to balance supply and demand), and the opposite is true when the economy is booming. Bond yields are thus positively correlated to inflation because during periods of high inflation savers won't want to invest in bonds that don't provide them with an acceptable inflation adjusted yield.  But high interest rates tend to have the effect or reining in inflation because it gets more costly for borrowers and thus puts a damper on new economic activity. So to summarize,"

positive: Imagine that the existing interest rate is 5%. So on a bond with face value of 100, you would be getting a $5 coupon implying a 5% yield. Now, if let's say the interest rates go up to 10%, then a new bond issued with a face value of 100 will give you a coupon of $10 implying a 10% yield. If someone in the bond market buys your bond after interest price adjustment, in order to make the 10% yield (which means that an investor typically targets at least the risk-free rate on his investments) he needs to buy your bond at $50 so that a $5 coupon can give a 10% yield. The reverse happens when interest rates go down. I hope this somewhat clears the picture. Yield = Coupon/Investment Amount Update: Since the interest rate of the bond does not change after its issuance, the arbitrage in the interest rate is reflected in the market price of the bond. This helps in bringing back the yields of old bonds in-line with the freshly issued bonds.

negative: Duration is the weighted average time until all the cash flows of a fixed income security are received. There are a few different measures of duration but generally, duration measures the sensitivity of the price of a fixed income asset to a change in the yield of that asset. If you're familiar with calculus, duration is the first derivative of price with respect to yield.  Convexity is the sensitivity of the duration of bond with respect to changes in yield, or the second derivative.   The first chart [here](http://www.investopedia.com/terms/c/convexity.asp#axzz1x4F075zM) will help. Convexity measures the curvature of the blue or pink line, the steeper the curve the higher the convexity.   The more cash flows there are in a bond (higher or more frequent coupon) the lower the duration, because you are receiving more of your investment earlier as opposed to later (think time value of money). If a bond has one cash flow, meaning you get paid back only at maturity (zero coupon) then any changes in interest rates will have a greater impact on the price of the bond since you are discounting only one cash flow in the future. Think of buying a bond with no coupons and a 5% yield that matures in 5 years, or a bond with similar yield and maturity buy pays a coupon. If interest rates rise, the zero coupon bond's price will fall more than the bond with coupons. Why? Because if you own the zero coupon bond you have to wait 5 years to get your money back and reinvest it at the higher rate, while if you have the bond that pays coupons you can reinvest those incremental cash flows at the higher rate, even though at purchase they had the same yield and maturity.  These are both tough concepts that took me a fair amount of time to really understand. If you're investing in bonds or any fixed income asset, these topics are crucial to understanding interest rate risk.

negative: Fundamentally interest rates reflect the time preference people place on money and the things money can buy.  If I have a high time preference then I prefer money in my hand versus money promised to me at some date in the future.  Thus, I will only loan my money to someone if they offer me an incentive which would be an amount of money to be received in the future that is larger than the amount of money I’m giving the debtor in the present (i.e. the interest rate). Many factors go into my time preference determination.  My demand for cash (i.e. my cash balance), the credit rating of the borrower, the length of the loan, and my expectation of the change in currency value are just a few of the factors that affect what interest rate I will loan money. The first loan I make will have a lower interest rate than the last loan, ceteris paribus.  This is because my supply of cash diminishes with each loan which makes my remaining cash more valuable and a higher interest rate will be needed to entice me to make additional loans.  This is the theory behind why interest rates will rise when QE3 or QEinfinity ever stops.  QE is where the Federal Reserve cartel prints new money to purchase bonds from cartel banks.  If QE slows or ends the supply of money will stop increasing which will make cash more valuable and higher interest rates will be needed to entice creditors to loan money. Note that increasing the stock of money does not necessarily result in lower interest rates.  As stated earlier, the change in value of the currency also affects the interest rate lenders are willing to accept.  If the Federal Reserve cartel deposited $1 million everyday into every US citizen’s bank account it wouldn’t take long before lenders demanded very high interest rates as compensation for the decrease in the value of the currency. Does the Federal Reserve cartel affect interest rates?  Yes, in two ways.  First, as mentioned before, it prints new money that is loaned to the government.  It either purchases the bonds directly or purchases the bonds from cartel banks which give them cash to purchase more government bonds.  This keeps demand high for government bonds which lowers the yield on government bonds (yields move inverse to the price of the bond).  The Federal Reserve cartel also can provide an unlimited amount of funds at the Federal Funds rate to the cartel member banks.  Banks can borrow at this rate and then proceed to make loans at a higher rate and pocket the difference. Remember, however, that the Federal Reserve cartel is not the only market participant.  Other bond holders, such as foreign governments and pension funds, buy and sell US bonds.  At some point they could demand higher rates.  The Federal Reserve cartel, which currently holds close to 17% of US public debt, could attempt to keep rates low by printing new money to buy all existing US bonds to prevent the yield on bonds from going up.  At that point, however, holding US dollars becomes very dangerous as it is apparent the Federal Reserve cartel is just a money printing machine for the US government.  That’s when most people begin to dump dollars en masse.

negative: He didn't lock in a growth rate of 4%. He locked in a yield of 4%. That's the amount the bond pays in interest on his original investment each year. If he just spends that money the bond will continue to pay 4% each year, but there's no growth. In order to get growth he has to reinvest the interest as it comes in; if he puts it into bonds, the return on that new money, and hence the growth, depends on the prevailing interest rate at the time that the interest is paid. That interest rate can be higher or lower than the original 4%; there's no connection between the two.

negative: "So ""Operation Twist"" is actually a pretty simple concept. Here's the break down: The Fed sells short-term treasury bonds that it already holds on its books. Short-term treasury bonds refer to - bonds that mature in less than three years. Then: Uses that money to buy long term treasury bonds. Long-term treasury bonds refer to -  bonds that mature in six to 30 years The reason: The fed buys these longer-term treasuries to lower longer-term interest rates and encourage more borrowing and spending. Diving deeper into how it works: So the Fed can easily determine short-term rates by using the Federal funds rate this rate has a direct effect on the following: However this does not play a direct role in influencing the rate of long-term loans (what you might pay on a 30-year fixed mortgage). Instead, long-term rates are determined by investors who buy and sell bonds in the bond market, which changes daily. These bond yields fluctuate depending on the health of the economy and inflation. However, the Fed funds rate does play an indirect role in these rates. So now that we know a little more about what effects what rate, why does lower long-term rates in treasuries influence my 30yr fixed mortgage? Well when you are looking for a loan you are entering a market and competing against other people, by people I mean anyone looking for money (e.g: my grandmother, companies, or the US government). The bank that lends you money has to decide weather the deal you are offering them is better then another deal on the market. If the risk of lending to one person is the same as the risk of lending to another, the bank will make whichever loan yields the higher interest rate. The U.S. government is considered a very safe borrower, so much so that government bonds are considered almost “risk free”, but because of the lower risk the rate of return is lower. So now the bank has to factor in this risk and make its decision weather to lend you money, or the government. So, if the government were to go to the market and buy its own long-term bonds it is adding demand in the market causing the price of the bond to rise in effect lowering the interest rate (when price goes up, yield goes down). So when you go back and ask for a loan it has to re-evaluate and decide ""Is it worth giving this money to Joe McFreeBeer instead and collecting a higher yield?"" (After all, Joe McFreeBeer is a nice guy). Here's an example: Lets say the US has a rating of 10 out of 10 and its bonds pay a 2% yield. Now lets say for each lower mark in rating the bank will lend at a minimum of 1% higher and your rating is 8 of 10. So if you go to market, the lowest rate you can get will be 4%. Now lets say price rises on the US treasury and causes the rate to go down by 1%. In this scenario you will now be able to get a loan for 3% and someone with a rating of 7 of 10 would be able to get that 4% loan. Here's some more info and explinations: Why is the Government Buying Long-Term Bonds? What Is 'Operation Twist'? A Q&A on US Fed Program Federal Reserve for Beginners Federal Open Market Committee"

negative: Bonds released at the same time have different interest rates because they have different levels of risks and liquidity associated.  Risk will depend on the company / country / municipality that offers the bond: their financial position, and their resulting ability to make future payments & avoid default. Riskier organizations must offer higher interest rates to ensure that investors remain willing to loan them money. Liquidity depends on the terms of the loan - principal-only bonds give you minimal liquidity, as there are no ongoing interest payments, and nothing received until the bond's maturity date. All bonds provide lower liquidity if they have longer maturity dates. Bonds with lower liquidity must have higher returns to compensate for the fact that you will have to give up your cash for a longer period of time. Bonds released at different times will have different interest rates because of what the general 'market rate' for interest was in those periods. ie: if a bond is released in 2016 with interest rates approaching 0%, even a high risk bond would have a lower interest rate than a bond released in the 1980s, when market rates were approaching 20%. Some bonds offer variable interest tied to some market indicator - those will typically have higher interest at the time of issuance, because the bondholder bears some risk that the prevailing market rate will drop. Note regarding sale of bonds after market rates have changed: The value of your bonds will fluctuate with the market. If a bond was offered with 1% interest, and next year interest rates go up and a new identical bond is offered for 2% interest, when you sell your old bond you will take a loss, because the market won't want to pay full price for it anymore. Whether you should sell lower-interest rate bonds depends on how you feel about the factors above - do you want junk bonds that have stock-like levels of returns but high risks of default, maturing in 30 years? Or do you want AAA+ Bonds that have essentially 0% returns maturing in 30 days? If you are paying interest on debt, it is quite likely that you could achieve a net income benefit by selling the bonds, and paying off debt [assuming your debt has a higher interest rate than your low-rate bonds]. Paying off debt is sometimes referred to as a 'zero risk return', because essentially there is no real risk that your lender would otherwise go bankrupt. That is, you will owe your bank the car loan until you pay it, and paying it is the only thing you can do to reduce it.  However, some schools of thought suggest that maintaining savings + liquid investments makes sense even if you have some debt, because cash + liquid investments can cover you in some emergencies that credit cards can't help you with. ie: if you lose your job, perhaps your credit could be pulled and you would have nothing except for your liquid savings to tide you over. How much you should save in this way is a matter of opinion, but often repeated numbers are either 3 months or 6 months worth [which is sometimes taken as x months of expenses, and sometimes as x months of after-tax income]. You should look into this issue further; there are many questions on this site that discuss it, I'm sure.

negative: Smallest risk of default would depend on where Alice and Bob live I suppose, but lets assume they are in a lower yielding nation where default is not a big concern.  Remember for instance that Greece was a lower yielding nation at one point and that the US has defaulted before. Let's start with Bob because he is easier to analyze.  Yield curves inversions generally pre-date recessions which is generally not so good for Bob as rates tend to drop during recessions and he will be at the short end of the curve so his bonds will be less sensitive.  However, he will generally get higher yields in good times to make up for this, but these higher yields come with a price in that he is generally much more sensitive to yield changes and can get much larger swings in portfolio value. First off as JB mentioned Alice would likely own inflation-linked (IL) bonds.  Which behave fairly differently from Bob's bonds. However, to keep this simple lets say they live in a place without IL bonds or IL bonds are not a consideration.  Then generally Alice has lower yielding bonds in good times but may do very well when the fed steps in during a crisis. So, who wins in the long run?  Likely Christi who owns a mix of a broad index of stocks and bonds in a risk mix where she wouldn't have to sell in downturns.  Especially, as Christi wouldn't have to pay the trading costs of moving her whole portfolio between long and short bonds.  Between Bob and Alice however Bob would likely win in the long run as the markets generally reward risk taking in the long run.  Still inflation (even without the IL bonds) and general rate trends (long-term rates are historically low right now) could have Bob losing for uncomfortably long periods.

negative: A stock is an ownership interest in a company.  There can be multiple classes of shares, but to simplify, assuming only one class of shares, a company issues some number of shares, let's say 1,000,000 shares and you can buy shares of the company. If you own 1,000 shares in this example, you would own one one-thousandth of the company.  Public companies have their shares traded on the open market and the price varies as demand for the stock comes and goes relative to people willing to sell their shares. You typically buy stock in a company because you believe the company is going to prosper into the future and thus the value of its stock should rise in the open market. A bond is an indebted interest in a company.  A company issues bonds to borrow money at an interest rate specified in the bond issuance and makes periodic payments of principal and interest.  You buy bonds in a company to lend the company money at an interest rate specified in the bond because you believe the company will be able to repay the debt per the terms of the bond.  The value of a bond as traded on the open exchange varies as the prevailing interest rates vary.  If you buy a bond for $1,000 yielding 5% interest and interest rates go up to 10%, the value of your bond in the open market goes down so that the payment terms of 5% on $1,000 matches hypothetical terms of 10% on a lesser principal amount.  Whatever lesser principal amount at the new rate would lead to the same payment terms determines the new market value.   Alternatively, if interest rates go down, the current value of your bond increases on the open market to make it appear as if it is yielding a lower rate. Regardless of the market value, the company continues to pay interest on the original debt per its terms, so you can always hold onto a bond and get the original promised interest as long as the company does not go bankrupt. So in summary, bonds tend to be a safer investment that offers less potential return.  However, this is not always the case, since if interest rates skyrocket, your bond's value will plummet, although you could just hold onto them and get the low rate originally promised.

negative: "At the most fundamental level, every market is comprised of buyers and selling trading securities. These buyers and sellers decide what and how to trade based on the probability of future events, as they see it. That's a simple statement, but an example demonstrates how complicated it can be. Picture a company that's about to announce earnings. Some investors/traders (from here on, ""agents"") will have purchased the company's stock a while ago, with the expectation that the company will have strong earnings and grow going forward. Other agents will have sold the stock short, bought put options, etc. with the expectation that the company won't do as well in the future. Still others may be unsure about the future of the company, but still expecting a lot of volatility around the earnings announcement, so they'll have bought/sold the stock, options, futures, etc. to take advantage of that volatility.  All of these various predictions, expectations, etc. factor into what agents are bidding and asking for the stock, its associated derivatives, and other securities, which in turn determines its price (along with overall economic factors, like the sector's performance, interest rates, etc.) It can be very difficult to determine exactly how markets are factoring in information about an event, though. Take the example in your question. The article states that if market expectations of higher interest rates tightened credit conditions... In this case, lenders could expect higher interest rates in the future, so they may be less willing to lend money now because they expect to earn a higher interest rate in the future. You could also see this reflected in bond prices, because since interest rates are inversely related to bond prices, higher interest rates could decrease the value of bond portfolios. This could lead agents to sell bonds now in order to lock in their profits, while other agents could wait to buy bonds because they expect to be able to purchase bonds with a higher rate in the future.  Furthermore, higher interest rates make taking out loans more expensive for individuals and businesses. This potential decline in investment could lead to decreased revenue/profits for businesses, which could in turn cause declines in the stock market. Agents expecting these declines could sell now in order to lock in their profits, buy derivatives to hedge against or ride out possible declines, etc. However, the current low interest rate environment makes it cheaper for businesses to obtain loans, which can in turn drive investment and lead to increases in the stock market. This is one criticism of the easy money/quantitative easing policies of the US Federal Reserve, i.e. the low interest rates are driving a bubble in the stock market. One quick example of how tricky this can be. The usual assumption is that positive economic news, e.g. low unemployment numbers, strong business/residential investment, etc. will lead to price increases in the stock market as more agents see growth in the future and buy accordingly. However, in the US, positive economic news has recently led to declines in the market because agents are worried that positive news will lead the Federal Reserve to taper/stop quantitative easing sooner rather than later, thus ending the low interest rate environment and possibly tampering growth.  Summary: In short, markets incorporate information about an event because the buyers and sellers trade securities based on the likelihood of that event, its possible effects, and the behavior of other buyers and sellers as they react to the same information. Information may lead agents to buy and sell in multiple markets, e.g. equity and fixed-income, different types of derivatives, etc. which can in turn affect prices and yields throughout numerous markets."

negative: "A junk bond is, broadly, a bond with a non-negligible risk of default.  (""Bond"" ought to be defined elsewhere, but broadly it's a financial instrument you buy from a company or government, where they promise to pay you back the principal and some interest over time, on a particular schedule.) The name ""junk"" is a bit exaggerated: many of them are issued by respectable and reasonably stable businesses. junk bonds were required to do large leveraged buyouts.  This means: the company issued fairly risky, fairly high-yield debt, to buy out equity holders.  They have to pay a high rate on the debt because the company's now fairly highly geared (ie has a lot of debt relative to its value) and it may have to pay out a large fraction of its earnings as interest. What is a junk bond and how does it differ from a regular bond?  It's only a matter of degree and nomenclature.  A bond that has a credit rating below a particular level (eg S&P BBB-) is called junk, or more politely ""non-investment grade"" or ""speculative"".  It's possible for an existing bond to be reclassified from one side to another, or for a single issuer to have different series some of which are more risky than others.  The higher the perceived risk, the more interest the bond must pay offer in order to attract lenders. Why is there higher risk/chance of default? Well, why would a company be considered at higher risk of failing to repay its debt?  Basically it comes down to doubt about the company's future earnings being sufficient to repay its debt, which could be for example:"

negative: You’ve really got three or four questions going here… and it’s clear that a gap in understanding one component of how bonds work (pricing) is having a ripple effect across the other facets of your question. The reality is that everybody’s answers so far touch on various pieces of your general question, but maybe I can help by integrating. So, let’s start by nailing down what your actual questions are:  1. Why do mortgage rates (tend to) increase when the published treasury bond rate increases? I’m going to come back to this, because it requires a lot of building blocks. 2. What’s the math behind a bond yield increasing (price falling?)  This gets complicated, fast. Especially when you start talking about selling the bond in the middle of its time period. Many people that trade in bonds use financial calculators, Excel, or pre-calculated tables to simplify or even just approximate the value of a bond. But here’s a simple example that shows the math.  Let’s say we’ve got a bond that is issued by… Dell for $10,000. The company will pay it back in 5 years, and it is offering an 8% rate. Interest payments will only be paid annually. Remember that the amount Dell has promised to pay in interest is fixed for the life of the bond, and is called the ‘coupon’ rate. We can think about the way the payouts will be paid in the following table:   As I’m sure you know, the value of a bond (its yield) comes from two sources: the interest payments, and the return of the principal. But, if you as an investor paid $14,000 for this bond, you would usually be wrong. You need to ‘discount’ those amounts to take into account the ‘time value of money’. This is why when you are dealing in bonds it is important to know the ‘coupon rate’ (what is Dell paying each period?). But it is also important to know your sellers’/buyers’ own personal discount rates. This will vary from person to person and institution to institution, but it is what actually sets the PRICE you would buy this bond for.  There are three general cases for the discount rate (or the MARKET rate). First, where the market rate == the coupon rate. This is known as “par” in bond parlance. Second, where the market rate < the coupon rate. This is known as “premium” in bond parlance. Third, where the market rate > coupon rate. This is known as a ‘discount’ bond.  But before we get into those in too much depth, how does discounting work? The idea behind discounting is that you need to account for the idea that a dollar today is not worth the same as a dollar tomorrow. (It’s usually worth ‘more’ tomorrow.) You discount a lump sum, like the return of the principal, differently than you do a series of equal cash flows, like the stream of $800 interest payments. The formula for discounting a lump sum is:  Present Value=Future Value* (1/(1+interest rate))^((# of periods)) The formula for discounting a stream of equal payments is:  Present Value=(Single Payment)* (〖1-(1+i)〗^((-n))/i) (i = interest rate and n = number of periods) **cite investopedia So let’s look at how this would look in pricing the pretend Dell bond as a par bond. First, we discount the return of the $10,000 principal as (10,000 * (1 / 1.08)^5). That equals $6,807.82.  Next we discount the 5 equal payments of $800 as (800* (3.9902)). I just plugged and chugged but you can do that yourself. That equals $3,192.18. You may get slightly different numbers with rounding.  So you add the two together, and it says that you would be willing to pay ($6,807.82 + $3,192.18) = $10,000. Surprise! When the bond is a par bond you’re basically being compensated for the time value of money with the interest payments. You purchase the bond at the ‘face value’, which is the principal that will be returned at the end.  If you worked through the math for a 6% discount rate on an 8% coupon bond, you would see that it’s “premium”, because you would pay more than the principal that is returned to obtain the bond [10,842.87 vs 10,000]. Similarly, if you work through the math for a 10% discount rate on an 8% coupon bond, it’s a ‘discount’ bond because you will pay less than the principal that is returned for the bond [9,241.84 vs 10,000].  It’s easy to see how an investor could hold our imaginary Dell bond for one year, collect the first interest payment, and then sell the bond on to another investor. The mechanics of the calculations are the same, except that one less interest payment is available, and the principal will be returned one year sooner… so N=4 in both formulae.  Still with me? Now that we’re on the same page about how a bond is priced, we can talk about “Yield To Maturity”, which is at the heart of your main question.  Bond “yields” like the ones you can access on CNBC or Yahoo!Finance or wherever you may be looking are actually taking the reverse approach to this. In these cases the prices are ‘fixed’ in that the sellers have listed the bonds for sale, and specified the price. Since the coupon values are fixed already by whatever organization issued the bond, the rate of return can be imputed from those values.  To do that, you just do a bit of algebra and swap “present value” and “future value” in our two equations.  Let’s say that Dell has gone private, had an awesome year, and figured out how to make robot unicorns that do wonderful things for all mankind. You decide that now would be a great time to sell your bond after holding it for one year… and collecting that $800 interest payment. You think you’d like to sell it for $10,500. (Since the principal return is fixed (+10,000); the number of periods is fixed (4); and the interest payments are fixed ($800); but you’ve changed the price... something else has to adjust and that is the discount rate.) It’s kind of tricky to actually use those equations to solve for this by hand… you end up with two equations… one unknown, and set them equal. So, the easiest way to solve for this rate is actually in Excel, using the function =RATE(NPER, PMT, PV, FV). NPER = 4, PMT = 800, PV=-10500, and FV=10000. Hint to make sure that you catch the minus sign in front of the present value… buyer pays now for the positive return of 10,000 in the future.  That shows 6.54% as the effective discount rate (or rate of return) for the investor. That is the same thing as the yield to maturity. It specifies the return that a bond investor would see if he or she purchased the bond today and held it to maturity.  3. What factors (in terms of supply and demand) drive changes in the bond market? I hope it’s clear now how the tradeoff works between yields going UP when prices go DOWN, and vice versa. It happens because the COUPON rate, the number of periods, and the return of principal for a bond are fixed. So when someone sells a bond in the middle of its term, the only things that can change are the price and corresponding yield/discount rate.  Other commenters… including you… have touched on some of the reasons why the prices go up and down. Generally speaking, it’s because of the basics of supply and demand… higher level of bonds for sale to be purchased by same level of demand will mean prices go down. But it’s not ‘just because interest rates are going up and down’. It has a lot more to do with the expectations for 1) risk, 2) return and 3) future inflation. Sometimes it is action by the Fed, as Joe Taxpayer has pointed out. If they sell a lot of bonds, then the basics of higher supply for a set level of demand imply that the prices should go down. Prices going down on a bond imply that yields will go up. (I really hope that’s clear by now). This is a common monetary lever that the government uses to ‘remove money’ from the system, in that they receive payments from an investor up front when the investor buys the bond from the Fed, and then the Fed gradually return that cash back into the system over time.  Sometimes it is due to uncertainty about the future. If investors at large believe that inflation is coming, then bonds become a less attractive investment, as the dollars received for future payments will be less valuable. This could lead to a sell-off in the bond markets, because investors want to cash out their bonds and transfer that capital to something that will preserve their value under inflation. Here again an increase in supply of bonds for sale will lead to decreased prices and higher yields.  At the end of the day it is really hard to predict exactly which direction bond markets will be moving, and more importantly WHY. If you figure it out, move to New York or Chicago or London and work as a trader in the bond markets. You’ll make a killing, and if you’d like I will be glad to drive your cars for you.  4. How does the availability of money supply for banks drive changes in other lending rates?  When any investment organization forms, it builds its portfolio to try to deliver a set return at the lowest risk possible. As a corollary to that, it tries to deliver the maximum return possible for a given level of risk.  When we’re talking about a bank, DumbCoder’s answer is dead on. Banks have various options to choose from, and a 10-year T-bond is broadly seen as one of the least risky investments. Thus, it is a benchmark for other investments.  5. So… now, why do mortgage rates tend to increase when the published treasury bond yield rate increases? The traditional, residential 30-year mortgage is VERY similar to a bond investment. There is a long-term investment horizon, with fixed cash payments over the term of the note. But the principal is returned incrementally during the life of the loan.  So, since mortgages are ‘more risky’ than the 10-year treasury bond, they will carry a certain premium that is tied to how much more risky an individual is as a borrower than the US government.  And here it is… no one actually directly changes the interest rate on 10-year treasuries. Not even the Fed. The Fed sets a price constraint that it will sell bonds at during its periodic auctions. Buyers bid for those, and the resulting prices imply the yield rate. If the yield rate for current 10-year bonds increases, then banks take it as a sign that everyone in the investment community sees some sign of increased risk in the future. This might be from inflation. This might be from uncertain economic performance. But whatever it is, they operate with some rule of thumb that their 30-year mortgage rate for excellent credit borrowers will be the 10-year plus 1.5% or something. And they publish their rates.

negative: "Great question!  A Yield Curve is a plot of the yields for different maturities of debt. This can be for any debt, but the most common used when discussing yield curves is the debt of the Federal Government. The yield curve is observed by its slope.  A curve with a positive slope (up and to the right) or a steepening curve, i.e. one that's becoming more positively sloped or less negatively sloped, may indicate several different situations. The Kansas City Federal Reserve has a nice paper that summarizes various economic theories about the yield curve, and even though it's a bit dated, the theories are still valid. I'll summarize the major points here. A positively sloped yield curve can indicate expectations of inflation in the future. The longer a security has before it matures, the more opportunities it has to be affected by changes in inflation, so if investors expect inflation to occur in the future, they may demand higher yields on longer-term securities to compensate them for the additional inflationary risk. A steepening yield curve may indicate that investors are increasing their expectations of future inflation. A positively sloped yield curve may also reflect expectations of deprecation in the dollar. The publication linked before states that depreciation of the dollar may have increased the perceived risk of future exchange rate changes and discouraged purchases of long-term Treasury securities by Japanese and other foreign investors, forcing the yields on these securities higher. Supply shocks, e.g. decreases in oil prices that lead to decreased production, may cause the yield curve to steepen because they affect short-term inflation expectations significantly more than long-term inflation. For example, a decrease in oil prices may decrease short-term inflation expectations, so short-term nominal interest rates decline. Investors usually assume that long-term inflation is governed more by fundamental macroeconomic factors than short-term factors like commodity price swings, so this price shock may lead short-term yields to decrease but leave long-term relatively unaffected, thus steepening the yield curve. Even if inflation expectations remain unchanged, the yield curve can still change. The supply of and demand for money affects the ""required real rate,"" i.e. the price of credit, loans, etc. The supply comes from private savings, money coming from abroad, and growth in the money supply, while demand comes from private investors and the government. The paper summarizes the effects on real rates by saying Lower private saving, declines in the real money supply, and reduced capital inflows decrease the supply of funds and raise the required real rate. A larger government deficit and stronger private investment raise the required real rate by increasing the demand for funds. The upward pressure on future real interest rates contributes to the yield curve's positive slope, and a steepening yield curve could indicate an increasing government deficit, declines in private savings, or reduced capital coming in from abroad (for example, because of a recession in Europe that reduces their demand for US imports). an easing of monetary policy when is economy is already producing near its capacity ... would initially expand the real money supply, lowering required short-term real interest rates. With long-term real interest rates unchanged, the yield curve would steepen. Lower interest rates in turn would stimulate domestic spending, putting upward pressure on prices. This upward price pressure would probably increase expected inflation, and as the first bullet point describes, this can cause long-term nominal interest rates to rise. The combination of the decline in short-term rates and the rise in long-term rates steepens the yield curve.  Similarly, an inverted yield curve or a positively sloped yield curve that is becoming less steep may indicate the reverse of some or all of the above situations. For example, a rise in oil prices may increase expectations of short-term inflation, so investors demand higher interest rates on short-term debt. Because long-term inflation expectations are governed more by fundamental macroeconomic factors than short-term swings in commodity prices, long-term expectations may not rise nearly as much as short term expectations, which leads to a yield curve that is becoming less steep or even negatively sloped. Forecasting based on the curve slope is not an exact science, just one of many indicators used.  Note - Yield Curve was not yet defined here and was key to my answer for What is the ""Bernanke Twist"" and ""Operation Twist""? What exactly does it do? So I took the liberty of ask/answer."

negative: What worked out well for me is a Capital One High Yield Savings Account, which came with a lower interest rate than most online accounts but higher than a brick & mortar bank. Also, since Capital One has Banking locations now, I can use the ATM card that came with this account to pull out the emergency money if I need it in a pinch at a place that doesn't accept checks.

negative: "Because the USA is the world's biggest economy - everybody in the world works with the USA (even if the american companies are not direct suppliers, they are surely somewhere in the supply chain). If USA credit rating is lower, that means american companies will find it harder to get loans to finance their business (i.e. the price of capital will be higher), and this will consequently lead to higher prices for partners of american companies, etc. This will certainly lead to slowdown of global economy. Plus, the lower credit rating also means that the USA govt. is less likely to pay off the debts (Chinese already stated they will diversify their bonds portfolio -i.e. they will start selling out american govt. bonds). This will lead to cuts in public sector in USA, less spending by the consumers, also probably less import from abroad and less travel which will affect - you get it - the ""RoW"". It's not by chance we have a saying in Europe, when USA sneezes, the rest of the world catches a flu!"

negative: Operation twist is just an asset swap. The balance sheet isn't being expanded, money isn't being printed to buy treasuries. The fed is just selling short term assets and buying longer term assets. If more longer term treasuries are bought this brings the yield down (for bonds the more you buy them, the lower the yield goes). Lower long term interest rates means people can borrow at low rates and this is supposed help the economy.   No printing of money means that gold doesn't get more precious.   I do think gold will do well though, if the ECB wants to save the EU they're going to have to print, and print a lot. The Bank of England is doing some QE too. Lots of countries will be/ are easing.

negative: tl,dr: I-bonds do not fit well into most personal finance plans. First the questions (succinct reference): I like your thought process weighing your liquidity and risk versus your return.  This is very important.  However, I think you might be sidetracked a bit by I-Bonds.  I-Bonds are not generally good for personal investment as they are not marketable when necessary, have redemption penalties and hold lower overall yields in general.  Finally, they are significantly harder to trade as you can buy and hold a TIPS ETF and get exposure to all maturities and get the current competitive rate all in one purchase. Inflation protection is in general an interesting problem.  While inflation-protected bonds sound like they are great for inflation protection (after all it is in the name), they may not be the best instruments for long/medium term protection.  It is really important to remember that inflation protected bonds have significantly lower returns and one form of inflation protection is to just have more money in the future.  TIPS really protect against large inflation changes as normal bonds have the future expected inflation already baked in their higher rates. Also, when you own a stock you own part of a company and inflation will increase the value of the company relative to the inflated currency.  Foreign stocks can give even more protection if you think inflation in your local currency is going to be higher then the foreign currency.  Stocks in the past have had significantly higher return overall than inflation protected bonds but have higher risk as well. As a medium term, low-risk portfolio, it is worth looking into some combination of TIPS, normal bonds and a small to medium allocation of local/foreign stocks all done through low-fee mutual funds or index ETFs.

negative: The government pays interest on its debts just like anyone else, but since it's already the government and already taking advantage of credit (your money loaned to it through the bonds), it doesn't need the extra benefit of taxing the interest it pays. **It's better off just issuing bonds at a lower interest rate and letting you keep all the interest, instead of a higher interest rate which will have some amount taxed and returned to it anyway.** The government wants a cut of private loan interest just like any other income, which is why interest on private bonds/loans is taxable.  Edit: What about municipal bonds? Wouldn't the federal government benefit from taxing interest on municipal bonds?   Municipal bonds are issued to support public infrastructure & services such as construction of water supply infrastructure. Since the goal is to improve facilities for the public benefit, and government programs ostensibly aim to provide public benefits as well, it allows the full proceeds of the bonds to go to the designated projects at the lowest possible interest rate (and the public pays the interest through city rates). Taxing municipal bonds would result in a higher cost to the public for the same end result (because of higher interest rates), with the net interest going to the federal & state governments via income tax on the interest.

negative: "Bonds are valued based on all of this, using the concept of the ""time value of money"". Simply stated, money now is worth more than money later, because of what you can do with money between now and later. Case in point: let's say the par value of a bond is $100, and will mature 10 years from this date (these are common terms for most bonds, though the U.S. Treasury has a variety of bonds with varying par values and maturation periods), with a 0% coupon rate (nothing's paid out prior to maturity). If the company or government issuing the bonds needs one million dollars, and the people buying the bonds are expecting a 5% rate of return on their investment, then each bond would only sell for about $62, and the bond issuer would have to sell a par value of $1.62 million in bonds to get its $1m now. These numbers are based on equations that calculate the ""future value"" of an investment made now, and conversely the ""present value"" of a future return. Back to that time value of money concept, money now (that you're paying to buy the bond) is worth more than money later (that you'll get back at maturity), so you will expect to be returned more than you invested to account for this time difference. The percentage of rate of return is known as the ""yield"" or the ""discount rate"" depending on what you're calculating, what else you take into consideration when defining the rate (like inflation), and whom you talk to. Now, that $1.62m in par value may be hard for the bond issuer to swallow. The issuer is effectively paying interest on interest over the lifetime of the bond. Instead, many issuers choose to issue ""coupon bonds"", which have a ""coupon rate"" determining the amount of a ""coupon payment"". This can be equated pretty closely with you making interest-only payments on a credit card balance; each period in which interest is compounded, you pay the amount of interest that has accrued, to avoid this compounding effect.  From an accounting standpoint, the coupon rate lowers the amount of real monies paid; the same $1m in bonds, maturing in 10 years with a 5% expected rate of return, but with a 5% coupon rate, now only requires payments totalling $1.5m, and that half-million in interest is paid $50k at a time annually (or $25k semi-annually). But, from a finance standpoint, because the payments made in the first few years are worth more than the payments made closer to and at maturity, the present value of all these coupon payments (plus the maturity payout) is higher than if the full payout happened at maturity, and so the future value of the total investment is higher.  Coupon rates on bonds thus allow a bond issuer to plan a bond package in less complicated terms. If you as a small business need $1m for a project, which you will repay in 10 years, and during that time you are willing to tolerate a 5% interest rate on the outstanding money, then that's exactly how you issue the bonds; $1 million worth, to mature in 10 years and a 5% coupon rate. Now, whether the market is willing to accept that rate is up to the market. Right now, they'd be over the moon with that rate, and would be willing to buy the bonds for more than their face value, because the present value would then match the yield they're willing to accept (as in any market system, you as the seller will sell to the highest bidder to get the best price available). If however, they think you are a bad bet, they'll want an even higher rate of return, and so the present value of all coupon and maturity payments will be less than the par value, and so will the purchase price."

negative: "Banks use the money for productive pursuits, earning returns in excess of what they will owe the fed in discount interest. If a bank could not yield a return greater than their interest due their lender (whether that lender is the fed or not) they probably wouldn't borrow in the first place. EDIT: I misunderstood the question. The federal reserve does not disseminate new money by making loans. They do so by issuing and trading in bonds. The US Treasury, for example, issues a bond. The Federal Reserve Bank buys this bond using money they ""printed"". So the same question applies.... where does the money come from to pay the interest on the bond? It comes from the perpetual issuance and trading in bonds at a growing rate. All the fed needs to do is to buy bonds at a rate faster than they collect interest."

negative: "The short of it is that bonds are valued based on a fundamental concept of finance called the ""time value of money"". Stated simply, $100 one year from now is not the same as $100 now. If you had $100 now, you could use it to make more money and have more than $100 in a year. Conversely, if you didn't invest it, the $100 would not buy as much in a year as it would now, and so it would lose real value. Therefore, for these two benefits to be worth the same, the money received a year from now must be more than $100, in the amount of what you could make with $100 if you had it now, or at least the rate of inflation. Or, the amount received now could be less than the amount recieved a year from now, such that if you invested this lesser amount you'd expect to have $100 in a year. The simplest bonds simply pay their face value at maturity, and are sold for less than their face value, the difference being the cost to borrow the cash; ""interest"". These are called ""zero-coupon bonds"" and they're around, if maybe uncommon. The price people will pay for these bonds is their ""present value"", and the difference between the present value and face value determines a ""yield""; a rate of return, similar to the interest rate on a CD. Now, zero-coupon bonds are uncommon because they cost a lot. If I buy a zero-coupon bond, I'm basically tying up my money until maturity; I see nothing until the full bond is paid. As such, I would expect the bond issuer to sell me the bond at a rate that makes it worth my while to keep the money tied up. So basically, the bond issuer is paying me compound interest on the loan. The future value of an investment now at a given rate is given by FV = PV(1+r)t. To gain $1 million in new cash today, and pay a 5% yield over 10 years, a company or municipality would have to issue $1.629 million in bonds. You see the effects of the compounding there; the company is paying 5% a year on the principal each year, plus 5% of each 5% already accrued, adding up to an additional 12% of the principal owed as interest. Instead, bond issuers can offer a ""coupon bond"". A coupon bond has a coupon rate, which is a percentage of the face value of the bond that is paid periodically (often annually, sometimes semi-annually or even quarterly). A coupon rate helps a company in two ways. First, the calculation is very straightforward; if you need a million dollars and are willing to pay 5% over 10 years, then that's exactly how you issue the bonds; $1million worth with a 5% coupon rate and a maturity date 10 years out. A $100 5% coupon bond with a 10-year maturity, if sold at face value, would cost only $150 over its lifetime, making the total cost of capital only 50% of the principal instead of 62%. Now, that sounds like a bad deal; if the company's paying less, then you're getting less, right? Well yes, but you also get money sooner. Remember the fundamental principle here; money now is worth more than money later, because of what you can do with money between now and later. You do realize a lower overall yield from this investment, but you get returns from it quickly which you can turn around and reinvest to make more money. As such, you're usually willing to tolerate a lower rate of return, because of the faster turnaround and thus the higher present value. The ""Income Yield %"" from your table is also referred to as the ""Flat Yield"". It is a very crude measure, a simple function of the coupon rate, the current quote price and the face value (R/P * V). For the first bond in your list, the flat yield is (.04/114.63 * 100) = 3.4895%. This is a very simple measure that is roughly analogous to what you would expect to make on the bond if you held it for one year, collected the coupon payment, and then sold the bond for the same price; you'd earn one coupon payment at the end of that year and then recoup the principal. The actual present value calculation for a period of 1 year is PV = FV/(1+r), which rearranges to r = FV/PV - 1; plug in the values (present value 114.63, future value 118.63) and you get exactly the same result. This is crude and inaccurate because in one year, the bond will be a year closer to maturity and will return one less coupon payment; therefore at the same rate of return the present value of the remaining payout of the bond will only be $110.99 (which makes a lot of sense if you think about it; the bond will only pay out $112 if you bought it a year from now, so why would you pay $114 for it?). Another measure, not seen in the list, is the ""simple APY"". Quite simply, it is the yield that will be realized from all cash flows from the bond (all coupon payments plus the face value of the bond), as if all those cash flows happened at maturity. This is calculated using the future value formula: FV = PV (1+r/n)nt, where FV is the future value (the sum of the face value and all coupon payments to be made before maturity), PV is present value (the current purchase price), r is the annual rate (which we're solving for), n is the number of times interest accrues and/or is paid (for an annual coupon that's 1), and t is the number of years to maturity. For the first bond in the list, the simple APY is 0.2974%. This is the effective compound interest rate you would realize if you bought the bond and then took all the returns and stuffed them in a mattress until maturity. Since nobody does this with investment returns, it's not very useful, but it can be used to compare the yield on a zero-coupon bond to the yield on a coupon bond if you treated both the same way, or to compare a coupon bond to a CD or other compound-interest-bearing account that you planned to buy into and not touch for its lifetime. The Yield to Maturity, which IS seen, is the true yield percentage of the bond in time-valued terms, assuming you buy the bond now, hold it to maturity and all coupon payments are made on time and reinvested at a similar yield. This calculation is based on the simple APY, but takes into account the fact that most of the coupon payments will be made prior to maturity; the present value of these will be higher because they happen sooner. The YTM is calculated by summing the present values of all payments based on when they'll occur; so, you'll get one $4 payment a year from now, then another $4 in two years, then $4 in 3 years, and $104 at maturity. The present value of each of those payments is calculated by flipping around the future value formula: PV = FV/(1+r)t. The present value of the entire bond (its current price) is the sum of the present value of each payment: 114.63 = 4/(1+r) + 4/(1+r)2 + 4/(1+r)3 + 104/(1+r)4. You now have to solve for r, which is difficult to isolate; the easiest way to find the rate with a computer is to ""goal seek"" (intelligently guess and check).  Based on the formula above, I calculated a YTM of .314% for the first bond if you bought on Sept 7, 2012 (and thus missed the upcoming coupon payment). Buying today, you'd also be entitled to about 5 weeks' worth of the coupon payment that is due on Sept 07 2012, which is close enough to the present day that the discounted value is a rounding error, putting the YTM of the bond right at .40%. This is the rate of return you'll get off of your investment if you are able to take all the returns from it, when you receive them, and reinvest them at a similar rate (similar to having a savings account at that rate, or being able to buy fractional shares of a mutual fund giving you that rate)."

negative: > The purpose of buying these bonds was not to step in due to the absence of a market. Rather, the purpose was to deliberately bid up the price of these bonds (ahead of the market), causing their price to rise and yields (interest rates) to drop.  There are some important things you need to understand about bubbles and how they form.  When interest rates are artificially low and down payments aren't required for many loans, do you agree this is a recipe for a bubble?

negative: "Question 1: How do I start? or ""the broker"" problem Get an online broker.  You can do a wire transfer to fund the account from your bank. Question 2: What criticism do you have for my plan? Dividend investing is smart.  The only problem is that everyone's currently doing it.  There is an insatiable demand for yield, not just individual investors but investment firms and pension funds that need to generate income to fund retirements for their clients.  As more investors purchase the shares of dividend paying securities, the share price goes up.  As the share price goes up, the dividend yield goes down.  Same for bonds.  For example, if a stock pays $1 per year in dividends, and you purchase the shares at $20/each, then your yearly return (not including share price fluctuations) would be 1/20 = 5%.  But if you end up having to pay $30 per share, then your yearly return would be 1/30 or 3.3% yield.  The more money you invest, the bigger this difference becomes; with $100K invested you'd make about $1.6K more at 5%.  (BTW, don't put all your money in any small group of stocks, you want to diversify).  ETFs work the same way, where new investors buying the shares cause the custodian to purchase more shares of the underlying securities, thus driving up the price up and yield down.  Instead of ETFs, I'd have a look at something called closed end funds, or CEFs which also hold an underlying basket of securities but often trade at a discount to their net asset value, unlike ETFs.  CEFs usually have higher yields than their ETF counterparts.  I can't fully describe the ins and outs here in this space, but you'll definately want to do some research on them to better understand what you're buying, and HOW to successfully buy (ie make sure you're buying at a historically steep discount to NAV [https://seekingalpha.com/article/1116411-the-closed-end-fund-trifecta-how-to-analyze-a-cef] and where to screen [https://www.cefconnect.com/closed-end-funds-screener] Regardless of whether you decide to buy stocks, bonds, ETFs, CEFs, sell puts, or some mix, the best advice I can give is to a) diversify (personally, with a single RARE exception, I never let any one holding account for more than 2% of my total portfolio value), and b) space out your purchases over time.  b) is important because we've been in a low interest rate environment since about 2009, and when the risk free rate of return is very low, investors purchase stocks and bonds which results in lower yields.  As the risk free rate of return is expected to finally start slowly rising in 2017 and gradually over time, there should be gradual downward pressure (ie selling) on the prices of dividend stocks and especially bonds meaning you'll get better yields if you wait.  Then again, we could hit a recession and the central banks actually lower rates which is why I say you want to space your purchases out."

negative: I would recommend not paying it off early for 2 key reasons: If you are a resident of the U.S. you get tax deductibility of mortgage interest, which as pointed out in previous posts, reduces the effective interest rate on your mortgage, never in your life will you ever be allowed to obtain such high leverage at such a low rates. You can probably get higher returns with not much risk. @JoeTaxpayer mentioned various statistics regarding returns when investing in equities. Even though they are a decent bet over the long term, you can get an even better risk reward tradeoff by considering municipal bonds. If you are in the U.S. and invest in the municipal bonds of your state, the interest income will be both federal and state tax-free.  In other words, if you were making 3.5% investing in equities, your after tax returns would be significantly less depending on your tax bracket whereas investment-grade municipal bond ETFs will yield probably the same or higher and have no tax. They are also significantly less volatile. Even though they have default risk, the risk is small since most of these bonds are backed by future tax obligations, or other income streams derived from hard assets such as tolls or property. Furthermore, an ETF will have a portfolio of these bonds which will also dampen the impact of any individual defaults. In essence, you are getting paid this spread for simply having access to credit, take advantage of it while you can.

negative: "1. Interest rates What you should know is that the longer the ""term"" of a bond fund, the more it will be affected by interest rates. So a short-term bond fund will not be subject to large gains or losses due to rate changes, an intermediate-term bond fund will be subject to moderate gains or losses, and a long-term bond fund will be subject to the largest gains or losses. When a book or financial planner says to buy ""bonds"" with no other qualification, they almost always mean investment-grade intermediate-term bond funds (or for individual bonds, the equivalent would be a bond ladder averaging an intermediate term). If you want technical details, look at the ""average duration"" or ""average maturity"" of the bond fund; as a rough guide, if the duration is 10, then a 1% change in interest rates would be a 10% gain or loss on the fund. Another thing you can do is look at long-term (10 years or ideally longer) performance history on some short, intermediate, and long term bond index funds, and you can see how the long term funds bounced around more. Non-investment-grade bonds (aka junk bonds or high yield bonds) are more affected by factors other than interest rates, including some of the same factors (economic booms or recessions) that affect stocks. As a result, they aren't as good for diversifying a portfolio that otherwise consists of stocks. (Having stocks, investment grade bonds, and also a little bit in high-yield bonds can add diversification, though. Just don't replace your bond allocation with high-yield bonds.) A variety of ""complicated"" bonds exist (convertible bonds are an example) and these are tough to analyze. There are also ""floating rate"" bonds (bank loan funds), these have minimal interest rate sensitivity because the rate goes up to offset rate rises. These funds still have credit risks, in the credit crisis some of them lost a lot of money. 2. Diversification The purpose of diversification is risk control. Your non-bond funds will outperform in many years, but in other years (say the -37% S&P 500 drop in 2008) they may not. You will not know in advance which year you'll get. You get risk control in at least a few ways. There's also an academic Modern Portfolio Theory explanation for why you should diversify among risky assets (aka stocks), something like: for a given desired risk/return ratio, it's better to leverage up a diverse portfolio than to use a non-diverse portfolio, because risk that can be eliminated through diversification is not compensated by increased returns. The theory also goes that you should choose your diversification between risk assets and the risk-free asset according to your risk tolerance (i.e. select the highest return with tolerable risk). See http://en.wikipedia.org/wiki/Modern_portfolio_theory for excruciating detail. The translation of the MPT stuff to practical steps is typically, put as much in stock index funds as you can tolerate over your time horizon, and put the rest in (intermediate-term investment-grade) bond index funds. That's probably what your planner is asking you to do. My personal view, which is not the standard view, is that you should take as much risk as you need to take, not as much as you think you can tolerate: http://blog.ometer.com/2010/11/10/take-risks-in-life-for-savings-choose-a-balanced-fund/ But almost everyone else will say to do the 80/20 if you have decades to retirement and feel you can tolerate the risk, so my view that 60/40 is the max desirable allocation to stocks is not mainstream. Your planner's 80/20 advice is the standard advice. Before doing 100% stocks I'd give you at least a couple cautions: See also:"

negative: While I don't disagree with the other answers as far as CD laddering goes (at least in principle), three months CDs are currently getting much lower rates than money market accounts, at least according to http://www.bankrate.com.  A savings account is also more liquid than CDs. Bonds are another option, and they can generally be liquidated quickly on the secondary market.  However, they can go down in value if interest rates rise (actually this is true of CDs as well--there is a secondary market, though  I believe only for brokerage CDs?). Bottom line, A high yield savings account is likely your best best.  As others noted, you should think of your emergency fund as savings, not investment.

negative: ">  Firstly, comparing debt to GDP is comparing a stock to a flow, you're committing a transgression that is warned about in Econ 101.  Perhaps you should learn a bit more.  He's talking bonds not stocks ... and even with stocks you've got a dividend discount model for establishing fair value (sum of discounted dividend flows = fair value of the company), etc..  With regard to the size of debt, you need to consider 3 things:  current interest expense (as a % of both GDP and Income (taxe revenue)), refinance cost ( change in interest expense if total debt is refinanced at current rates), and the first derivative of interest expense w.r.t. current yields.  This helps one understand the probability of a ""death spiral"" such as what was experienced in Greece (et. al.) where it was *impossible* to make debt payments at refinance rates.  The fact is that with US interest expenses on the debt of  $450B/year this is 13.5% of all government revenue.  If you factor in the interest expenses with even slightly higher yields ... one sees that you can quickly get a debt crisis.  If Trump gives as large a tax cut as he has promised, it has a much higher prospect of a debt death spiral.  Do the math."

negative: "QUICK ANSWER When it comes to fixed income assets, whether rental real estate or government bonds, it's unusual for highly-leveraged assets to yield less than the same asset unleveraged or lowly-leveraged.  This is especially so in countries where interest costs are tax deductible. If we exclude capital losses (i.e. the property sells in future at a price less than it was purchased) or net rental income that doesn't keep up with maintenance, regulatory, taxation, inflation and / or other costs, there is one primary scenario where higher leverage results in lower yields compared to lower leverage, even if rental income keeps up with non-funding costs.  This occurs when variable rate financing is used and rates substantially increase. EXPLANATION Borrowers and lenders in different countries have different mortgage rate customs.  Some are more likely to have long-term fixed rates; some prefer variable rates; and others are a hybrid, i.e. fixed for a few years and then become variable. If variable rates are used for a mortgage and the reference rates increase substantially, as they did in the US during the 1970s, the borrower can easily become ""upside-down,"" i.e. owe more on the mortgage than the property is then worth, and have mortgage service costs that exceed the net rental income.  Some of those costs aren't easy to pass along to renters, even when there are periodic lease renewals or base rent increases referencing inflation rates.  Central banks set policies for what would be the lowest short-term rates in a country that has such a bank.  Private sector rates are established broadly by supply and demand for credit and can thus diverge markedly from central bank rates. Over time, the higher finance-carrying-cost-to-net-rental-income ratio should abate as (1) rental market prices change to reflect the costs and (2) the landlord can reinvest his net rental income at a higher rate.  In the short-term though, this can result in the landlord having to ""eat"" the costs making his yield on his leveraged fixed income asset less than what he would have without leverage, even if the property was later sold at same price regardless of financing method. ========== Interestingly, and on the flip side, this is one of the quirks in finance where an accounting liability can become, at least in part, an economic asset.  If a landlord borrows at a high loan-to-value ratio for a fixed interest rate for the life of the mortgage and rates, variable and fixed, were to increase substantially, the difference between his original rate and the present rates accrues to him. If he's able to sell the property with the loan attached (which is not uncommon for commercial, industrial and sometimes municipal real estate), the buyer will be assuming a liability with a lower carrying cost than his present alternatives and will hence pay a higher price for the property than if it were unleveraged. With long-term rates in many economically advanced countries at historic lows, if a borrower today were to take a long-term fixed rate loan and rates shortly after increased substantially, he may have an instant profit in this scenario even if his property hasn't increased in value."

negative: Typically developing economics are marked by moderate to high inflation [as they are growing at a faster pace], higher in savings rate and higher lending rates. If you reduce the lending rate, more business / start-up will borrow at cheaper rate, this in turn means lowers savings rate and leads to higher inflation. To combat this Central Banks make borrowing expensive, which lowers inflation and increases the saving rate. Essentially all these 3 are tied up. As to why these countries offer higher interest on USD is because most of the developing countries have trade [current account] deficit. They need to bring in more USD in the country. One of the ways is to encourage Non Resident Citizens to park their foreign earning back home, ensuring more funds USD inflow.  The rate differential also acts as a guide as to how the currency would be valued against USD. For example if you get 8% on USD, less than 12% had you converted same to Rouble, at the end of say 3 years, the exchange rate between USD and Rouble would factor that 4%, ie rouble will go down. Developed countries on the other hand are marked by low inflation [they have already achieved everything] as there is no spurt in growth, it more BAU. They are also characterized by low savings and lending rates.

negative: "The real question is what does FT mean by ""Eurozone Bond"". There is no central European government to issue bonds. What they seem to be quoting is the rate for German Bunds. Germany has a strong economy with a manageable debt load, which means it is a safe Euro denominated investment. Bunds are in high demand across the Eurozone, which drives their price up, and their yield down. Greek 10yr bonds, which are Euro denominated, are yielding over 8%."

negative: "There are a couple of different things that could be referenced by ""cheap money"": The money supply itself - This is the Federal Reserve printing more money which could devalue the existing US dollars and thus make the dollars even cheaper since there would be more of them. Interest rates - Currently in the US interest rates are rather low which means that borrowers could possibly get good rates on that money thus making it relatively cheap.  Compare current interest rates to the early 1980s and there is a major difference. In terms of implications on the stock market, there are a couple that come to my mind: Investment options - With low interest rates, cash and bonds aren't necessarily yielding that much and thus some people may be more likely to invest elsewhere with stocks being an option.  Thus, there may be some people that would rather invest in stocks than hold their investments in lower-yielding options. Corporate spending - If rates stay low, then for companies with good financial track records, they could borrow money to expand operations rather than sell more stock and thus there may be companies that borrow to grow so that they take advantage of these interest rates."

negative: The SEC 30-Day Yield you're seeing is a standardized yield calculation set out by the Securities & Exchange Commission.  It can be useful for comparing bond funds, but it doesn't guarantee what you'll actually earn from a fund. IMPORTANT: The SEC 30-day yield represents a bond fund's returns from the previous 30 days expressed as an annual percentage of the current fund price — yes, an annual percentage. In other words, don't expect 1.81% return on your money every 30 days!  Such a return is too-good-to-be-true return in today's low rate environment.  1.81% per year?  More reasonable. Even then, the 1.81% you see is merely an estimate, one based on assumptions, of what you might expect to earn if you keep your money in place for the next year.  The estimate is based on the assumptions that: These aren't reliable assumptions.  BIV's price does fluctuate.  You are not promised to get your principal back with a bond fund.  Only an individual bond promises your principal back, and only at maturity. So, earning $181 on $10,000 invested for a full year while taking on interest-rate and other risks might not be worth the trouble of putting your money in a brokerage account. You'll need to transfer the money in and out, and there are potential trading fees to take into account.  (How much to buy/sell units?) An FDIC-insured high interest savings account makes more sense.

negative: This directly relates to the ideas behind the yield curve. For a detailed explanation of the yield curve, see the linked answer that Joe and I wrote; in short, the yield curve is a plot of the yield on Treasury securities against their maturities. If short-term Treasuries are paying higher yields than long-term debt, the yield curve has a negative slope. There are a lot of factors that could cause the yield curve to become negatively sloped, or at least less steep, but in this case, oil prices and the effective federal funds rate may have played a significant role. I'll quote from the section of the linked answer that describes the effect of oil prices first: a rise in oil prices may increase expectations of short-term inflation, so investors demand higher interest rates on short-term debt. Because long-term inflation expectations are governed more by fundamental macroeconomic factors than short-term swings in commodity prices, long-term expectations may not rise nearly as much as short term expectations, which leads to a yield curve that is becoming less steep or even negatively sloped. As the graph shows, oil prices increased dramatically, so this increase may have increased expectations of short-term inflation expectations substantially.  The other answer describes an easing of monetary policy, e.g. a decrease in the effective federal funds rate (FFR), as a factor that could increase the slope of the yield curve. However, a tightening of monetary policy, e.g. an increase in the FFR, could decrease the slope of the yield curve because a higher FFR leads investors to demand a higher rate of return on shorter-term securities. Longer-term Treasuries aren't as affected by short-term monetary policy, so when short-term yields increase more than long-term yields, the yield curve becomes less steep and/or negatively sloped. The second graph shows the effective federal funds rate for the period in question, and once again, the increase is significant.  Finally, look at a graph of inflation for the relevant period.  Intuitively, the steady increase in inflation from 1975 onward may have increased investors expectations of short-term inflation, therefore increasing short-term yields more than long-term yields (as described above and in the other answer). These reasons aren't set in stone, and just looking at graphs isn't a substitute for an actual analysis of the data, but logically, it seems plausible that the positive shock to oil prices, increases in the effective federal funds rate, and increases in inflation and expectations of inflation contributed at least partially to the inversion of the yield curve. Keep in mind that these factors are all interconnected as well, so the situation is certainly more complex. If you approve of this answer, be sure to vote up the other answer about the yield curve too.

negative: "Since you want to know exactly what ""yield"" means, let's get all the details of the security down first. Treasury Bills are 0-1 year and do not pay interest/coupons. The yield comes from buying the T-Bill at a discount. For example, you buy a T-Bill for $99 and it pays $100 when it matures, and the yield over that holding period is 1/99. When people talk about ""yield"" they are generally talking about annualized yield unless stated otherwise.  Treasury Notes are 2-10 years. They pay interest semi-annually. Treasury Bonds are 20-30 years and they also pay interest semi-annually. Again, ""yield"" is typically the annualized yield, or the two semi-annual interest payments added together (without compounding). These have interest payments so they are typically sold at par. They may trade a premium/discount afterwards.  TIPS pay a constant coupon rate, but the principal is adjusted up and down with inflation."