Bonds are debt owed by a government or a company. The holder of a bond is paid interest until the date when the bond matures. Then the amount of the bond, its face value, is paid back.
Investors can buy a new bond and keep it until it matures. Or they can buy and sell existing bonds. The return on a bond is called the yield. Yields and prices of existing bonds can change as investors trade them.
Yields fall when investors seek the security of bonds and are willing to pay higher prices. Yields increase as prices fall.
This month, yields on the ten-year Treasury note rose above five percent for the first time in close to a year. Higher yields raise the cost for individuals and businesses to borrow money at interest rates that are tied to the ten-year note.
Rising yields can also hurt stock prices. When yields rise, investors often sell stocks in order to buy bonds. If investors can get high yields holding low-risk bonds, or simply keeping money in the bank, they will do it. Yet holding bonds can also have risks as values for new and existing bonds change in the market.
Bond prices can also drop on signs of inflation. But inflation does not seem to be a threat with the current softness in the American housing market. New housing starts fell more than two percent in May.
Most experts believe the United States central bank will keep interest rates unchanged when policy makers meet next week. But many investors are concerned about pressure for higher interest rates in Europe and Asia.
Another influence on the bond market is the willingness of foreign countries to buy United States government debt. In Asia there have been signs that some countries that hold a lot of low-yield debt want GREater returns on their investments. China, for example, recently announced it will invest three billion dollars in the Blackstone Group, the private-equity company in New York.
For much of the last year, bond yields have been inverted. Short-term debt returned higher rates than long-term debt. In the past, an inverted yield curve was thought to signal a possible recession. Now things are back to what is considered "normal" with long-term debt paying higher yields.
And that's the VOA Special English Economics Report, written by Mario Ritter. I'm Steve Ember.
