Current Zero Coupon Bond Rates vs Historical

Zero Coupon Bond Rates

Current zero coupon bond rates can vary, sometimes significantly, depending on whether the bond is a Treasury bond, another municipal choice, or a corporate option. The duration of the bond also plays a large role in the rates offered by the bond. The current average rate for zero coupon treasury bonds is around 3% for a 20 year duration, and this rate is very low when compared to historical prices for this type of government issued bond. Other municipal bonds also have a rate offered that is close to this average. Corporate bonds that are zero coupon type will usually offer a higher rate because there are higher risks involved, and the current rate for corporate zero coupon securities can be as high as 7% or more depending on the credit rating and duration of the bond. Bonds which have a shorter duration will usually offer a lower rate, and the rate for a 4 week bond may be as little as 0.06 percent. A 10 year Treasury security currently has a rate of less than 2%.

In 1980 the zero coupon bond rates were very high, with an average rate of around 10%. These high rates were due to the high interest rates in the country. By 1999 the average rates for Treasury issued zeros was around 13%, and this rate continued to increase up to 15% for 30 year bonds. The record rates did not last as long s many investors expected though. In the early 2000s the interest rates started to drop again, and this affected all rates including treasury bonds rates. A slowing economy and stimulus measures started the downward slide for the interest rates and all types of bonds were generally affected.

By 2002 the zero coupon bond rates averaged 5%-6% for Treasury issued securities and municipal offerings, but corporate zeros were still seeing interest rates of 8%-10% regularly for higher risk offerings. Zero coupon municipal bonds at this time averaged between 4% and 6% annually. This was a big difference from just 5 years earlier and was caused by the downward oriented economy around the globe. Even foreign corporate zero coupon securities were not paying the same rate in 2002 as in years past.

The zero coupon bond rates offered today are extremely low compared to the historical value of these rates. Interest rates have plummeted in recent years and the rates offered for zero coupons have followed this trend. Corporate bond interest rates are typically higher than municipal and treasury bonds but all rates follow the rate set by the government. With corporate the zero coupon bonds rate will typically be the rate set plus the specific additional points added for the increased risk. This is the method that has been used since securities were initially stripped to create the first zeros. As the economy strengthens the rates offered by these bonds will increase but currently the rate is extremely low. This has caused many investors to look elsewhere for a higher yield.