Why Does the Yield on the 10-Year Treasury Note Matter? - YouTube

Investors keep an eye on a lot of numbers,

but the yield on the 10-year Treasury note is one of the most closely watched.

Why does such a seemingly plain jane government bond garner so much attention?

Because it can tell you quite a lot about the broader economy and

even impact other financial markets. Let’s start by discussing what the 10-year Treasury note is.

The 10-year Treasury note is a type of bond issued by the U.S. Federal Government to fund itself.

Treasuries are a loan investment, which means investors loan money to the U.S. government for a

set period of time in exchange for a defined rate of return, known as yield. The length of time of

the loan investment is known as the maturity. Once an investor purchases a Treasury bond,

the investor receives regularly scheduled payments until the bond matures. At maturity,

the government pays back the full amount, or principal, that was originally invested.

Treasuries are classified into three types based on their length of maturity.

Bills have a maturity of less than a year. Notes have a maturity of one to 10 years. And bonds have

a maturity greater than 10 years. Typically, the longer the maturity, the higher the yield.

At the simplest level, the yield on the 10-year Treasury is the rate of return an investor would

expect when purchasing 10-year Treasuries. But to understand why that rate is important,

you need to understand how yield is determined for Treasuries.

Yield is driven by supply and demand. When times are tough,

and there’s volatility in the stock market, investors often choose to move more money

toward Treasury bonds because they’re relatively safer than stocks.

Treasuries are considered one of the safest investments in the world

because they’re backed by the full faith and credit of the U.S. government.

This flight to safety pushes the price of those bonds up because investors are willing to pay more

for the smaller yield. When the economy is doing well, and there tends to be less demand for the

10-year Treasury note, or bonds in general, the opposite is true. Prices go down and as a result,

yields go up, attracting investors back to the bond market. Though, in such a scenario,

investors may be less interested in bonds because of the higher potential return in stocks.

With a maturity that falls about in the middle of Treasuries, the 10-year yield is seen as an

indicator of investor sentiment about the direction of the economy in the midterm.

The 10-year also acts as an economic indicator because it’s part of the yield curve.

It plots the yield offered by bonds of different maturity lengths. The slope of the yield curve can

often tell you about investor confidence in the economy. Normally, the yield curve is positive,

meaning it slopes up. It’s normal to expect higher yields on bonds with longer maturities

to compensate investors for keeping their money tied up longer. If the yield curve is inverted, it

means that yield for longer-term notes are lower than the yield of the 2-year note. Typically,

that can suggest investors are bearish because they’re pessimistic about the future of the

economy. Investors can then use this information when considering their investing strategy.

The yield on the 10-year Treasury note is important for a few other reasons.

First off, it can be a useful tool in measuring against other potentially riskier investments.

For example, the yield on a 10-year note can be used as the risk-free rate in financial

modeling to calculate fundamental measures and value stocks. Basically, if investors

can expect a certain return from a typically safe investment like the 10-year Treasury,

it can help them determine the expected returns of other riskier investments

and if those additional returns are worth the additional risk.

The 10-year yield is also a proxy for mortgage rates. Historically, rates on 30-year mortgages

have closely tracked the 10-year yield. So, rising yields can mean higher mortgage rates,

which can slow borrowing and spending in the broader economy. Falling yields, on the other

hand, can increase homebuying or refinancing to fund spending that can boost the economy.

Similarly, the 10-year yield influences rates at which businesses can borrow.

Higher rates can make it more expensive for companies to grow, while lower rates can mean

companies can borrow more cheaply, potentially boosting the economy and the stock market.

Whether used as a gauge of investor sentiment about the direction of the economy

or as a benchmark for valuing stocks or other risk investments, the yield on the 10-year

Treasury note is one of the most important indicators many investors keep an eye on.