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In the US, the long bond has long (no pun intended) been used as the key benchmark for the bond market. Many news organizations report on the daily price of the long bond and its yield as an indicator of the general bond market trends. It is no accident that the long bond has been given this distinction; it is the most widely held bond in the world. Given that, other bonds usually take their cues from the long bond, following its price direction as it fluctuates. (Note: recently the 10-year note has also shown some promise in becoming a benchmark.)

The Treasury Department sells the long bond in pre-announced auctions, and the yield on the long bond (and by definition, its price) is determined by the demand when the auction takes place. After obtaining the long bond, the purchasers can hold the bonds to their maturity (30 years), collecting interest payments every 6 months and finally collecting the original principal at the maturity date. (Beware that the long bond is callable, meaning that the government can pay off the principal and terminate its obligation before the maturity date is reached.) Many long-term buyers consisting of countries, companies, and individuals looking for long-term guaranteed income do just that. Others however may opt to trade their bonds at the bond market. The price of the long bond is determined (as usual) by supply and demand, which are driven by many factors and their complex interaction.

For example, if the Treasury Department auctions a large quantity of long bonds or if the demand for them is soft, the price of the long bond decreases. On the other hand, if the Treasury Department auctions fewer long bonds or engages in a buyback program (i.e., paying down the debt by calling them), the price of the long bond will increase (and its yield will decrease proportionally). In the end, the price settles at what the buyers would pay and what the sellers would ask. …