IntroIn general term, a bond's yield is the return an investor expects to receive each year over its term to maturity, assuming the bond with not be sold before. For the investor who has purchased the bond in the open market after its issuance, the bond yield is the overall coming from the remaining interest payments and principal they will receive, relative to the price of the bond.
Risk freeA risk-free bond is a bond that repays interest and principal with absolute certainty and no risk of ever defaulting. Its rate of return would be the risk-free interest rate. In such an investment, investors experience no risk by investing in such an asset.
In practice, government bonds of financially stable countries are treated as risk-free bonds, as governments can raise taxes or indeed print money to repay their domestic currency debt. Germany and the US have been widely considered to date as examples of risk-.free bonds in their respective regions.
Chart guideIn the chart above we monitor the relative performance of two risk-free government bonds across different maturities. Subject to the selected performance timeframe, such chart is a useful guide to see if German/European bonds are overperforming (or not) their US peers (on a local currency basis, meaning that no currency movements are considered here)
Market implicationsWe can draw two different conclusions here. First, we can see if yields are compressing faster in Germany/EU or in the US per each bond maturity. Remember that lower bond yields drive their prices higher.
Second, we can observe if investors have preferred (or avoided) shorter duration or longer duration bonds in any given period, subject to their inflation, rate and growth views.