10-Year Treasury Note and How It Works

Why It's the Most Important

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The 10-year Treasury note is a loan you make to the U.S. federal government. It's the only one that matures in a decade. The U.S. Treasury Department auctions the 10-year Treasury note. 

The note is the most popular debt instrument in the world because it's backed by the guarantee of the U.S. economy. Compared to most other countries' sovereign debt, there is little risk of a U.S. debt default.

How 10-Year Treasury Rates Work

The 10-year Treasury note rate is the yield or rate of return on your investment. Treasurys are initially sold at auction by the Treasury Department. It sets a fixed face value and interest rate. It's easy to confuse the fixed interest rate with the yield on the Treasury. Many people refer to the yield as the Treasury rate. When people say "the 10-year Treasury rate," they don't always mean the fixed interest rate paid throughout the life of the note. They often mean the yield.

Treasury products are sold to the highest bidder at either the initial auction or on the secondary market. When there is a lot of demand, investors bid at or above the face value. In that case, the yield is low because they will get a lower return on their investment. It's worth it to them, though, because they know their investment is safe. They are willing to accept a low yield in return for lower risk. That's why you'll see Treasury rates fall during the contraction phase of the business cycle.

It will drive bank lending rates, and all other interest rates, down. It provides greater liquidity right when the economy needs it.

When there's a bull market or the economy is in the expansion phase of the business cycle, there are plenty of other investments. Investors are looking for more return than a 10-year Treasury note will give. As a result, there's not a lot of demand. Bidders are only willing to pay less than the face value. When that happens, the yield is higher. Treasurys are sold at a discount, so there is a greater return on the investment. In short, Treasury rates always move in the opposite direction of Treasury bond prices.

Treasury yields change every day because they are resold on the secondary market. Hardly anyone keeps them for the full term. If bond prices drop, it means so has demand for Treasurys. That drives yields up as investors require more return for their investments.

How It Affects You

As yields on the 10-year Treasury notes rise, so do the interest rates on 10-15 year loans, such as the 15-year fixed-rate mortgages. Investors who buy bonds are looking for the best rate with the lowest return. If the rate on the Treasury note drops, then the rates on other, less safe investments can also fall and remain competitive.

The 10-year Treasury note yield is also the benchmark that guides other interest rates. The major exception is adjustable rate mortgages, which follow the fed funds rate.

The Federal Reserve watches the 10-year Treasury yield before making its decision to change the fed funds rate. The 10-year Treasury note, like all other Treasurys, is sold at an auction. The yield indicates the confidence that investors have in economic growth.

Mortgages and other loan rates will always be higher than Treasurys. They must compensate investors for their higher risk of default. Even if 10-year Treasury yields fell to zero, mortgage interest rates would be a few points higher. Lenders must cover their processing costs.

How does this affect you? It makes it cost less to buy a home. You've got to pay the bank less interest to borrow the same amount. As home buying becomes less expensive, demand rises. As the real estate market strengthens, it has a positive effect on the economy. It increases GDP growth, which creates more jobs.

Investing in the 10-year Treasury note is safe, even though the current U.S. debt is more than 100 percent debt-to-GDP ratio. That means that it would take the entire production of the American economy a year to pay off its debt. Investors get worried about a country's ability to pay when the ratio is more than 77 percent. That's the tipping point, according to the World Bank. It's not a problem when it only lasts for a year or two but can depress growth if it lasts for decades.

Since the United States can always print more dollars, there's virtually no reason it ever needs to default. The only way it could is if Congress didn't raise the debt ceiling. That would forbid the U.S. Treasury from issuing new Treasury notes. 

Recent Trends and Record Lows

Usually, the longer the time frame on a Treasury product, the higher the yield. Investors require a higher return for keeping their money tied up for a longer period. That's called the yield curve.

On June 1, 2012, the 10-year Treasury rate fell to its lowest point since the early 1800s. It hit an intra-day low of 1.442 percent. Investors worried about the eurozone debt crisis and a poor jobs report. On July 25, 2012, it closed at 1.43, the lowest point in 200 years. 

On July 1, 2016, it beat that record. The yield hit an intra-day low of 1.385 percent.  Investors were concerned about the United Kingdom's vote to leave the European Union

The yield rebounded in 2017. First, Donald Trump's win in the 2016 presidential election sent it to 2.60 percent. Since then it's fallen a bit, to 2.48 percent as of December 21, 2017.

The 10-Year Note and the Treasury Yield Curve

You can learn a lot about where the economy is in the business cycle by looking at the Treasury yield curve. The curve is a comparison of yields on everything from the one-month Treasury bill to the 30-year Treasury bond. The 10-year note is somewhere in the middle. It gives an indication of how much return investors need to tie up their money for 10 years. If they think the economy will do better in the next decade, they will require a higher yield to keep their money socked away. When there is a lot of uncertainty, they don't need much return to keep their money safe.

Usually, investors don't need much return to keep their money tied up for only short periods of time, and they need a lot more to keep it tied up for longer. For example, on April 24, 2018, the yield curve was:

  • 1.70 percent on the one-month Treasury bill.
  • 2.48 percent on the two-year Treasury note.
  • 3 percent on the 10-year Treasury note.
  • 3.18 percent on the 30-year Treasury bond.

That's a normal yield curve although it’s flattening. The spread between the 10-year note and the 2-year note is only 0.52 percentage points. Investors only require that much more to keep their money tied up for 10 years versus 2 years. That means they think the economy will grow more in the future than it's growing now. When investors demand more return in the short term than in the long run, they think the economy is headed for a recession. What then occurs is called an inverted yield curve.

An inverted curve is an abnormal phenomenon in which the yields on short-term bonds become higher than those on long-term ones. This happens when people have lost confidence in the stability of the economy in the next several months. People would rather stash their investment in very low-risk, long-term Treasurys, like the 10-year note, than take their chances with bills in the short-term.