Intermediate/Medium-Term Debt

Medium-term debt is a type of fixed income security with a maturity, or date of principal repayment, that is set to occur in two to 10 years. Bonds and other fixed income products tend to be classified by their maturity dates, as it is the most important variable in the yield calculations.

Debt is typically categorized into terms to maturity. There are three terms of debt – short-term, long-term, and medium-term debt. A short-term debt security is one that matures within a short period of time, typically within a year. An example of a short-term debt is a Treasury bill, or T-bill, issued by the U.S. Treasury with terms of 4 weeks, 13 weeks, 26 weeks, and 52 weeks.

Long-term debt refers to fixed income securities set to mature more than 10 years from the issue or purchase date. Examples of long-term debt include the 20-year and 30-year Treasury bonds. Long-term debt is more sensitive to interest rate changes than short-term debt given that there is a greater probability of interest rates rising within a longer time period than within a shorter time frame.

Intermediate or medium-term debt are classified as debt that is due to mature in two to 10 years. Typically, the interest on these debt securities is greater than that on short-term debt of similar quality but less than that on comparably rated long-term bonds. The interest rate risk on medium-term debt is higher than that of short-term debt instruments but lower than the interest rate risk on long-term bonds. In addition, compared to short-term debt, an intermediate-term debt carries greater risk that higher inflation could erode the value of expected interest payments. Examples of medium-term debt are the Treasury notes issued with 2-year to 10-year maturities.

During the life of a medium-term debt security, the issuer may adjust the term of maturity or the nominal yield of the bond according to the issuer's needs or the demands of the market - a process known as shelf registration. Like regular bonds, medium term notes are registered with the Securities and Exchange Commission (SEC) and are also usually issued as coupon-bearing instruments.

In recent years, there has been a steady decline in the issuance of long-term bonds. In fact, the 30-year U.S. Treasury bond was discontinued in 2002 as the spread between intermediate-term and long-term bonds reached all-time lows. Though the 30-year Treasury was revived in 2006, for many fixed income investors, the 10-year bond became the "new 30-year," and its rate was considered the benchmark rate for many calculations.

The yield on a 10-year Treasury is an important metric in the financial markets as it is used as a benchmark that guides other interest rates, such as mortgage rates. The 10-year Treasury is sold at an auction and indicates consumers’ level of confidence in economic growth. For this reason, the Federal Reserve watches the 10-year Treasury yield before making its decision to change the fed funds rate. As yields on the 10-year Treasury note rises, so do the interest rates on 10-15 year loans, and vice versa.

The Treasury yield curve can also be analyzed to understand where an economy is in the business cycle. The 10-year note lies somewhere in the middle of the curve and, thus, provides an indication of how much return investors need to tie up their money for ten years. If investors believe the economy will do better in the next decade, they will require a higher yield on their medium- to long-term investments. In a standard (or positive) yield curve environment, intermediate-term bonds pay a higher yield for a given credit quality than short-term bonds, but a lower yield compared to long-term (10+ years) bonds.