Treasury yields can tell you when to buy stocks

— -- Q: What does it mean when the price of government debt securities, called Treasuries, falls? How can the price of Treasuries be an indicator for stock investors to watch?

A: Bond and stock investors don't tend to hang out together much.

The stock crowd loves to talk about new companies with exciting growth prospects and new projects. Bond investors talk yield, stability and credit quality.

But both stock and bond investors pay close attention to trading in government debt, known as Treasuries, and so should you.

The reason Treasuries prices are so important is that they put a floor under investor expectations, because Treasuries are some of the safest investments you can make.

Investing in a risky upstart company's stock might serve up a huge loss, but when you buy a Treasury bill, note or bond, you have a pretty good idea you'll get your money back.

Treasuries are the preferred investment for investors who want to take very little risk. That's not to say Treasuries are risk-free, though, as you can read about here.

I'll show you how to interpret the yield on Treasury securities. Imagine, for example, that the 10-year Treasury is yielding 3.5%. That means by taking very little default risk, you can count on getting a 3.5% return every year on your investment.

Now, imagine you have the chance to invest in a brand-new company that's working on several new, untested products. What if I told you that you could get a 3.5% return on that investment? You'd say I was crazy, right? After all, why would you accept a 3.5% return on an investment that might end up being worthless and burning up your investment? You wouldn't, since you could get the same return with very little risk.

That's why watching Treasury yields is so critical. If yields are 3.5% on Treasuries, you need to get a much higher return if you invest in something riskier, such as a stock.