What is the 30‑Year Treasury?
– The 30‑year Treasury is a U.S. government bond (a long‑term debt security) that matures 30 years after issuance. It pays interest twice a year (semiannually) and returns the face (par) value at maturity. Because the U.S. government backs these bonds, they are viewed as very low credit‑risk instruments.
Key definitions (first use)
– Coupon: the stated annual interest rate paid on the bond, expressed as a percentage of par. Coupon payments are generally split into two semiannual payments.
– Yield to Maturity (YTM): the annualized return an investor would receive if the bond is held to maturity, given the current market price.
– Par, premium, discount: par = issue or face value (often $1,000). A bond sells at par when its coupon equals market YTM. It sells at a premium when coupon > YTM, and at a discount when coupon coupon → bond issued at a discount (price < par).
– If YTM = coupon → bond issued at par (price = par).
– If YTM par).
– Individual bidders at Treasury auctions: non‑competitive bids up to $5 million (guarantees allocation at the yield set by the auction); competitive bidders may bid for up to 35% of an issue.
– Market trading: Treasuries trade in $100 increments; the minimum purchase is $100.
Special considerations for the 30‑year Treasury
– Interest‑rate risk: long maturity makes prices more sensitive to changes in market interest rates. When rates rise, long‑dated bond prices fall more than short‑dated bonds.
– Inflation risk: fixed coupon payments lose purchasing power if inflation accelerates (TIPS address this by adjusting principal).
– Liquidity and benchmark role: the 30‑year used to be the bond market’s long‑term bellwether, but market participants more often reference the 10‑year Treasury as the benchmark now. Still, demand and sentiment toward the 30‑year can signal broader long‑term rate expectations.
– Relative yield: to compensate for duration and inflation risk, 30‑year Treasuries typically offer higher yields than shorter Treasuries.
Worked numeric example (30‑year bond priced vs market yield)
Assume:
– Face (par) value = $1,000
– Coupon = 3.0% annual (so $30 per year, paid as $15 every six months)
– Maturity = 30 years → 60 semiannual periods
– Market YTM = 4.0% annual → 2.0% semiannual
Price = present value of semiannual coupons + present value of $1,000 par:
– PV(coupons) = 15 × [1 − (1 + 0.02)^(−60)] / 0.02 ≈ $521.63
– PV(par) = 1,000 × (1 + 0.02)^(−60) ≈ $304.50
– Total price ≈ $521.63 + $304.50 = $826.13
Interpret
The bond is priced below par because its coupon rate (3.0%) is lower than the market yield (4.0%). Investors buying at a discount will earn the market rate of return over time. This reflects how bond prices adjust in response to interest rate changes…