Just about every day in our Capital Market Updates, we talk about Treasury auctions, bonds, and bills, as part of our Mortgage News. But unless you have a background or enormous interest in economics, chances are a lot of this can be confusing. For example, what’s the difference between a bond and a bill? Why are auctions necessary and who buys these bonds? What does this do to mortgage rates, and how does this apply to me? Well, here are answers to those questions and more.

The U.S. Government regularly borrows from investors (foreign and internal) large sums of money. This money is used to finance debt, and the method to do so is through Treasury auctions. This is also considered the safest investment you could make, because the only way the U.S. couldn’t pay you back is when the entire country fails – not likely right?

So the whole auction process begins when the Treasury makes a public announcement about how much they’re going to auction off, the length of the investment, and how much they need to raise in funding. How do you hear of this announcement? Well, all major news sources should cover this announcement, such as television news stations, newspapers, etc.

How Often Does the Treasury Have Auctions Then?

On Mondays, the Treasury auctions off bills. Bills are the shortest-term government security you can purchase. Currently there are 13-week and 26-week bills auctioned on a weekly basis. Then, every month the Treasury auctions off notes. The difference between bills, notes, and bonds is the length of time for the investment. Notes range anywhere from 2 to 10 years, and come in 2-year, 5-year, and 10-year terms. Lastly there are bonds, which are for terms longer than 10 years such as the 30-year bonds, although in 2001 the Treasury decided to suspend the 30-year bond inflation – indexed bonds.

When the Treasury borrows large amounts of money, this changes the overall supply of money within the U.S. A lower interest rate brings greater demand for the money, whereas a shorter supply of money leads to higher interest rates. For more information on how mortgage rates are determined, check out What Determines Mortgage Rates? And find out how the Federal Reserve also influences mortgage rates.

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3. How Do Short Sales Work?

Tags: Bills, Bonds, Mortgage Rates, Notes, Treasury Auctions