Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
The 10-year Treasury gets more press than any other government security. Investors pay keen attention to movements in 10-year Treasury yields because they serve as a benchmark for other borrowing rates, such as mortgage rates. When the 10-year yield fluctuates, it can have significant implications across the financial landscape.
What Is a 10-Year Treasury?
A 10-year Treasury is a bond that guarantees interest plus repayment of the borrowed money in a decade. The 10-year Treasury is just one of a handful of securities issued by the U.S. government. Others include:
•Treasury bills, also known as T-bills, are short-term securities, with maturities that range from a few days to 52 weeks. Treasury bills are sold at a discount to their face value, meaning they provide investors with returns by paying them back at the full, not discounted, rate.
•Treasury notes, also known as T-notes, are issued with maturities of two, three, five, seven and 10 years. They pay interest every six months and return their face value at maturity.
•Treasury bonds, also known as T-bonds, are the longest-term government securities, issued for 20 and 30 years. They pay interest every six months and return their face value at maturity.
Treasuries vs Treasurys
When reading about a group of 10-year Treasuries, you may see it written one of two ways: Treasuries or Treasurys. This unorthodox plural, spelled with -ys instead of the conventional -ies, is used by many financial and media outlets. There aren’t any good explanations for this tendency, but publications like CNBC and The Wall Street Journal spell it -ys.
What Is the 10-Year Treasury Yield?
The 10-year Treasury yield is the current rate Treasury notes would pay investors if they bought them today.
Changes in the 10-year Treasury yield tell us a great deal about the economic landscape and global market sentiment, professional investors analyze patterns in 10-year Treasury yields and make predictions about how yields will move over time. Declines in the 10-year Treasury yield generally indicate caution about global economic conditions while gains signal global economic confidence.
On October 23, 2023, the 10-year Treasury note topped 5.00% once again for the first time in more than 15 years. However, back in April 2000, the 10-year yield was 6.23%. If you look at the chart below, you’ll see that 10-year Treasury yields have fallen dramatically since 1990.
Let’s take a closer look at the 10-year Treasury yield in 2016. On July 5, 2016, the 10-year Treasury yield had fallen to a (then) record low of 1.37% shortly after the conclusion of a referendum in which the citizens of the United Kingdom voted to leave the European Union. This political earthquake rattled markets around the world, which is why the 10-year yield declined.
Meanwhile, when Donald Trump was elected president of the United States in November 2016, the 10-year yield gained considerably, reaching 2.60% by mid December.
Note that the 10-year Treasury yield stayed well above its July 2016 low for years—until the Covid-19 pandemic began in 2020. On March 9, 2020, the 10-year Treasury yield notched an all-time low of 0.54% as investors panicked and global markets were thrown into chaos by the outbreak of the pandemic.
How 10-Year Treasury Yields Work
The U.S. Treasury issues 10-year T-notes at a face value of $1,000, and a coupon specifying a certain amount of interest to be paid every six months. The notes are sold to institutional investors, like banks and other financial companies, through auctions conducted by the Federal Reserve. Institutions then resell these notes to investors in the secondary market.
It’s the action in the secondary market that determines the yield. This is important to note because it’s this rate that people refer to when they’re talking about Treasuries. The coupon rate, while technically the interest rate you will receive in relation to the Treasury’s face value, will likely be different from the effective yield you end up getting. If you pay less than face value, your effective rate will be higher; more and it will be lower.
Prices (and therefore effective yields) change for bonds almost constantly. That’s because a bond’s price is inversely related to yield: When demand is high and Treasury prices rise, yields fall—conversely, when demand is low Treasury prices fall and yields rise. This ebb and flow ultimately creates the Treasury pricing market as people flock to (and then from) Treasuries based on the economic environment they find themselves in.
Remember, all U.S. Treasury securities are regarded as risk free—since they’re backed by the full faith and credit of the United States government, which has never defaulted on its debts. When investors get worried about the economy and market risk, they look for safe investments that preserve capital, and Treasuries are among the safest investments out there.
One of the foundational principles of finance is that risk and return are correlated. When markets are booming and the economy is expanding, the appetite to take on risk and generate returns is high. Risk-free Treasuries become much less appealing because of their lower returns. Demand declines and Treasury notes sell at less than their face value.
Why Is the 10-Year Treasury Yield Important?
The 10-year Treasury yield serves as a vital economic benchmark, and it influences many other interest rates. When the 10-year yield goes up, so do mortgage rates and other borrowing rates. When the 10-year yield declines and mortgage rates fall, the housing market strengthens, which in turn has a positive impact on economic growth and the economy.
The 10-year Treasury yield also impacts the rate at which companies can borrow money. When the 10-year yield is high, companies will face more expensive borrowing costs that may reduce their ability to engage in the types of projects that lead to growth and innovation.
The 10-year Treasury yield can also impact the stock market, with movements in yield creating volatility. Rising yields may signal that investors are looking for higher return investments but could also spook investors who fear that the rising rates could draw capital away from the stock market. Falling yields suggest that corporate borrowing rates will also decline, making it easier for companies to borrow and expand, thus giving equities a boost.
Global events can also have a significant impact on Treasury yields—like the case of the U.K. referendum about E.U. membership mentioned above. U.S. government bonds are considered the safest investments anywhere in the world, and when geopolitical events create upheaval, Treasurys are often in high demand from international investors, leading to lower yields.
Should You Invest in 10-Year Treasuries?
There are good reasons to consider buying Treasuries. As we’ve mentioned already, there’s no safer investment anywhere.
Coupon payments provide guaranteed income, and your investment will be safe regardless of what happens in the economy or the financial markets. Ten-year notes can offer a compromise between the extremely low payouts on T-bills and the higher risk having to hold onto longer-maturity T-bonds. As a bonus, most government bonds are not subject to state and local taxes, though you’ll still owe federal taxes on any income you earn.
Investors should aim to have some amount of bonds or other fixed income investments in their asset allocation to enhance portfolio diversification, so fixed income Treasuries may very easily have a home in your investing strategy. That said, how much space you allocate for them depends entirely on your age. A younger investor with a long-term horizon should have a much lower allocation to fixed income, particularly low-interest government bonds, than an investor who is much closer to retirement age.
For individuals in retirement, the allocation to bonds should be significantly higher with a mix of higher-yielding bonds that can generate an income stream with lower-yielding bonds for capital preservation. Many retirees, particularly those who work with a financial advisor, can benefit from laddered bond portfolios that incorporate a variety of maturity dates to create a continuous stream of income.
Consider Treasury ETFs
Building a fixed income portfolio can be a complicated process. Investors interested in government bonds need not dive into the secondary market themselves. A multitude of index funds and exchange-traded funds (ETFs) offer fixed income exposure with varying levels of risk. Investors can choose funds that invest only in government securities or a total bond market index fund that invests in a highly diversified portfolio of bonds.
While you may want to discuss investing in Treasury securities with your financial advisor, it’s wise to pay attention to the 10-year Treasury yield. Whether you want to invest in the stock market, buy a house or a car or borrow money to build a company, the 10-Year Treasury rate exerts its influence on one and all.
