Central Banks and US Treasury Bonds

Original Published Date on Medium: September 20th, 2025

Reference: https://medium.com/@virikajuneja/us-treasury-bonds-and-central-banks-42046bdffd81

Today, I delve into a topic, which took me some time to understand — US Treasury Bonds.

What are US Treasuries? They are types of debt instruments issues by the US Government. In a bank loan, the bank pays me the loan and I am is expected to pay interest to the bank. Similarly, when I buy a US Treasury Bond, I loan my money to the US Government and it pays me an interest called coupon. At the end of the time period of the bond, the US Government will return the money I used to buy the bond. So, when I buy a bond, I end up making a profit through the interest that the US Government pays me.

Central Banks around the world buy US Treasuries, among other assets such as gold. However, over the years Central Banks have reduced their investments in US Treasuries and instead increased their investments in Gold. Per Reuters, the overall share of US Treasuries in Central Banks has now reduced to 23% vs 30% in 2010s.

If Central Banks are selling US Treasury Bonds, then why are the yields still high (image above)? Should the yields not decrease? Well, the answer lies in the return expectations of investors, which is represented by yields.

As Central Banks sell off US Treasuries, the demand goes down, which means prices go down. This means that investors are will to pay less to buy the US Treasury instrument. To attract more investors, the yields or expected returns of US Treasuries rises. This is the reason why the yields still remain high

This is similar why a cut in Fed rates would lower borrowing costs to increase the demand for borrowing by reducing bank loan interest rates.