Are these really bond yields?
"that would imply that a 30Y US Treasury bond only yields 2.78%, which is nonsensically low. Those are annualized yields.  It would be more precise to say that ""a 30Y US Treasury bond yields 2.78% per year (annualized) over 30 years"", but that terminology is implied in bond markets. So if you invest $1,000 in a 30-year T-bond, you will earn roughly 2.78% in interest per year. Also note that yield is calculated as if it compounded, meaning that investing in a 30-year T-bind will give you a return that is equivalent to putting it in a savings account that earns 1.39% interest (half of 2.78%) every 6 months and compounds, meaning you earn interest on top of interest. The trade-off for these low yields is you have virtually no default risk.  Unlike a company that could go bankrupt and not pay back the bond, the US Government is virtually certain to pay off these bonds because it can print or borrow more money to pay off the debts. In addition, bonds in general (and especially treasuries) have very low market risk, meaning that their value fluctuates much less that equities, even indicies.  S&P 500 indices may move anywhere between -40% and 50% in any given year, while T-bonds' range of movement is much lower, between -10% and 30% historically)." Yes those are really yields. A large portion of the world has negative yielding bonds in fact. This process has been in motion for the past 10 years for very specific reasons. So congratulations on discovering the bond market. But it also can't be 1.46%, because that would imply that a 30Y US Treasury bond only yields 2.78%, which is nonsensically low. The rates are displayed as of Today. As the footnote suggests these are to be read with Maturities. A Treasury with 1 year Maturity is at 1.162% and a Treasury with 30Y Maturity is at 2.78%. Generally Bonds with longer maturity terms give better yields than bonds of shorter duration. This indicates the belief that in long term the outlook is positive. It's worth pointing out that a bulk of the bond market is institutional investors (read: large corporations and countries). For individuals, it's very easy to just put your cash in a checking account.  Checking accounts are insured and non-volatile.  But what happens when you're GE or Apple or Panama?   You can't just flop a couple billion dollars in to a Chase checking account and call it a day.  Although, you still need a safe place to store money that won't be terribly volatile.  GE can buy a billion dollars of treasury bonds.  Many companies need tremendous amounts of collateral on hand, amounts far in excess of the capacity of a checking account; those funds are stored in treasuries of some sort. Separately, a treasury bond is not a substitute investment for an S&P index fund.  For individuals they are two totally different investments with totally different characteristics.  The only reason an individual investor should compare the return of the S&P against the readily available yield of treasuries is to ensure the expected return of an equity investment can sufficiently pay for the additional risk. "Those are the ""right"" yields. They are historically (but not ""nonsensically"") low. Those yields are reflective of the sluggish U.S. and global economic activity of the past decade. If global growth were higher, the yields would be higher. The period most nearly comparable to the past 10 years in U.S. and world history was the depressed 1930s. (I am the author of this 2004 book that predicted a stock market crash (which occurred in 2008), and the modern 1930s, but I was wrong in my assumption that the modern 1930s would involve another depression rather than 'slow growth.')"
My question is (ok a lot of questions) how viral are these borrowing cost increases? Will other European countries need to raise bond yields to sell bonds? Will the US? Will the US be lending Spain part of the $125b bailout money and raise borrowing costs? "You are asking multiple questions here, pieces of which may have been addressed in other questions.  A bond (I'm using US Government bonds in this example, and making the 'zero risk of default' assumption) will be priced based on today's interest rate. This is true whether it's a 10% bond with 10 years left (say rates were 10% on the 30 yr bond 20 years ago) a 2% bond with 10 years, or a new 3% 10 year bond.  The rate I use above is the 'coupon' rate, i.e. the amount the bond will pay each year in interest. What's the same for each bond is called the ""Yield to Maturity."" The price adjusts, by the market, so the return over the next ten years is the same.  A bond fund simply contains a mix of bonds, but in aggregate, has a yield as well as a duration, the time-and-interest-weighted maturity.  When rates rise, the bond fund will drop in value based on this factor (duration). Does this begin to answer your question?" I wrote one to check against the N3 to N6 bonds: http://capitalmind.in/2011/03/sbi-bond-yield-calculator/ Things to note: Negative coupons are not the same as a negative yield. A $1000 bond that you purchase, at a premium, for $2100 that produces 10 annual coupons of $100 and a redemption of $1000 has a real, positive coupon ($100). The holder of the bond gets this coupon, and the maturity value However, you get back less than your initial investment.  There is no growth; the original investment shrinks, or has a negative growth rate.  Most mortgage or bond calculators choke on this situation... This is pretty basic question, but my head is confused :(  If you buy a $1000 bond with 5% interest rate, so it would be $1050 at maturity  what does it mean?  * you will be paid the interest in coupons (paid in coupons until it totals $50) and at maturity paid $1000 (in one large single payment) * you get paid the full value in coupons ($1050 split by multiple coupons)  Any other explanations of how a bond works are welcome, most of the stuff I could find was about what yield is, not how the bond actually works. "As trane_0 suggested above, I am not questioning the validity of the study by Kenichi Ueda and Beatrice Weder Di Mauro. I don't doubt that there is some discount to the risk premium demanded in the market for the debt of systemically important banks.   What I am doubting is that this is a ""subsidy"" by the US government. This is a ""subsidy"" by bond investors, not the US government. Additionally, it is based on the assessment of risk by those investors as there is no explicit guarantee by the US government (see Lehman Brothers and Bear Stearns). There is no transfer of wealth by the US government and therefore there is no active subsidy." Bonds can increase in price, if the demand is high and offer solid yield if the demand is low.  For instance, Russian bond prices a year ago contracted big in price (ie: fell), but were paying 18% and made a solid buy.  Now that the demand has risen, the price is up with the yield for those early investors the same, though newer investors are receiving less yield (about 9ish percent) and paying higher prices.   I've rarely seen banks pay more variable interest than short term treasuries and the same holds true for long term CDs and long term treasuries.  This isn't to say it's impossible, just rare.  Also variable is different than a set term; if you buy a 10 year treasury at 18%, that means you get 18% for 10 years, even if interest rates fall four years later.   Think about the people buying 30 year US treasuries during 1980-1985.  Yowza. So if you have a very large amount of money you will store it in bonds as its much less likely that the US treasury will go bankrupt than your bank. Less likely?  I don't know about your bank, but my bank doesn't owe $19 trillion. Bonds are extremely illiquid and have traditionally traded in bulk.  This has changed in recent years, but bonds used to be traded all by humans not too long ago. Currently, price data is all proprietary.  Prices are reported to the usual data terminals such as Bloomberg, Reuters, etc, but brokers may also have price gathering tools and of course their own internal trade history. Bonds are so illiquid that comparable bonds are usually referenced for a bond's price history.  This can be done because non-junk bonds are typically well-rated and consistent across ratings. "I mean, it's only a difference of an order of magnitude, really.  Until you consider the following:  1) Only a fraction of the $800B Muni bonds market is new issue.  2) True spreads on Muni bonds are hard enough to calculate as is because they're all OTC.   3)The author quotes that the particular bid was for an 87K/year return on a notional of $300M. That's a spread of a whopping 3 basis points that the bank took extra over ""true value"".  4) Intraday vol for almost any financial instrument is more than 3 basis points.  5) So that's what he's making this big deal over? THREE basis points? I don't even know the length of my penis to within three basis points, and I challenge you to find anyone who could name the yield on the 10Y Treasury within 3 basis points." "The answer is yes. And the reason is if today's interest rates are lower than the interest rate (coupon) at which the bond was issued. The bond's ""lifetime value"" is 100 cents on the dollar. That's the principal repayment that the investor will get on the maturity date. But suppose the bond's coupon rate is 4% while today's interest rate is 3%. Then, people who bought the bond at 100 would get 4% on their money, while everyone else was getting 3%. To compensate, a three year bond would have to rise to almost 103 so that the so-called yield to maturity"" would be 3%. Then there would be a ""capital loss"" (from almost 103 to 100) that would exactly offset the extra interest, that is 1% ""more"" for three years. If today's interest rates are negative (as they were from time to time in the 1930s, and in the present decade), the ""negative"" interest rates will prevent the buyer from getting the ""lifetime value"" (as defined by the OP) of principal plus interest over the original life of the bond. This happens in a ""flight to quality"" situation, where people are willing to take a (small) capital loss on Treasuries in order to prevent a large possible loss from bank failures like those that took place in 2008." What you said is technically correct. But the implication OP might get from that statement is wrong. If the Fed buys bonds and nominal yields go down (Sometimes they might even go up if it meant the market expected the Fed's actions to cause more inflation), inflation expectations don't go down unless real yields as measured by TIPs stay still. With the formula you are using you assume that the issued bond (bond A) is a perpetual. Given the provided information, you can't really do more than this, it's only an approximation.  The difference could be explained by the repayment of the principal (which is not the case with a perpetual). I guess the author has calculated the bond value with principal repayment.  You can get more insight in the calculation from the excel provided at this website: http://breakingdownfinance.com/finance-topics/bond-valuation/fixed-rate-bond-valuation/ "Beyond the yield/price relationship, a good intuitive way to understand it is just this: these people control a substantial amount of money that could be essentially loaned to governments.   If they feel a particular policy is likely to lead to inflation or default, they may decide not to loan that country any more money.  All else being equal, with a smaller supply of possible borrowers, the country will have to pay higher interest to fund a particular amount of debt. Furthermore they may loudly publicly announce that they will no longer lend to that country, in which case other participants may be persuaded that they too should no longer lend at the going rate.  What's more, this is somewhat self-fulfilling: as rates go up, the country will spend more money servicing its debt, and will in fact become a worse risk.   So I think the thing that gives them their ""vigilante"" nature is that governments worry they will round up a posse and things will run away.  As far as actual incentives, I would welcome more information but I think the main bond vigilante case is that they are basically long on the country but want it to tighten up its policy so their existing holdings don't decline." That's not what he's saying at all.  Basically most of his argument (4 of 6 points) is the connection between bond prices and equity prices. It's not particularly interesting but it definitely doesn't always apply either. If bond yields fall, then so too should equity earnings yields if spreads remain relatively constant, i.e. higher equity prices. Additionally, if bond yields are low, then any future equity growth gets capitalized at a much higher value because discount rates are much lower. Again, not particularly insightful.  The two interesting comments were about oil and cash as a % of assets at financial institutions. Both of these are likely linked to falling or low rates above, because banks can't invest profitably at low rates and hence hold cash and equivalents instead, and oil prices are more likely to fall in a low or falling inflation environment (implied by the low rates or Fed tightening).  Really, I think hes's saying something more obvious but not necessarily trivial, which is if one asset class goes up, so too is another related one. "All of the other answers here are accurate, but (I think) are missing the point as to the question, which rests on how Bonds work in the first place. The bond specifies a payback AMOUNT and DATE. Let's say it is $10,000 and one year from today. If you buy that today for $9900, your yield will be 1%. If you buy it today for $11,000, your yield will be less than 0% (please don't make me do the math - it's just under negative 1%). You might be willing to pay that 1% (rather than receive 1%) for the certainty that you will definitely get your money back. The combined actions of all the people who may be willing to pay a little more or a little less for the safety of a US Treasury Bond is what people call ""the Market.""  Market forces (generally, investor confidence) will drive the price up and down, which affects the yield. All the other stuff - coupons and inflation and whatnot - all of that only makes sense if you understand that you aren't buying a rate of return, you are buying a payback amount and date."