The 10-year Treasury is like the weatherman of the lending market. When the yield on these government securities changes, it can indicate a shift in the weather pattern across all borrowing rates, from the interest rate on bonds to mortgage rates.
Considered the safest long-term investment, the 10-year Treasury yield “is the most widely referenced interest rate benchmark across the globe,” says Jake Remley, a chartered financial analyst and senior portfolio manager at Income Research + Management. Even if you don’t own bonds, he says the 10-year Treasury yield can be used as the basis to value the future cash flows of assets you do invest in.
For these reasons, it’s important to understand what the 10-year Treasury yield is and how it impacts your investments.
What is the 10-year Treasury yield?
The 10-year Treasury yield is the annualized rate of return you would earn on a 10-year Treasury note issued by the U.S. government if you held the note to maturity. “It is often referred to as the ‘risk-free rate’ given the reputation of the U.S. government’s ability to pay its debts and finance itself,” says Charles Curry, Jr., managing director and senior portfolio manager of U.S. fixed income at Xponance.
Many financial valuations use the 10-year Treasury yield as a reference rate for their calculations, he says, such as with discounted cash flow calculations, which are used to estimate how much an investment is worth today based on its future income. It is also frequently used to determine the spread, or interest rate premium, investors may earn on other securities.
“The 10-year Treasury indicates many things. But it primarily acts as a baseline interest rate for all financial markets in the U.S. and a major interest rate (and) economic indicator globally,” Curry says. “It can also serve as a barometer for Fed activity in terms of its yield relative to short-term rates and can presage stages of the business cycle.”
This business cycle prediction can be seen in the yield curve, which plots the interest rates of bonds with the same credit quality but different maturity dates.
What is the current 10-year Treasury yield?
As of Oct. 23, the two-year Treasury, with a 5.1% yield, is higher than the 10-year Treasury. The current 10-year Treasury yield is 4.9%. The yield day high for the 10-year hit over 5%, the highest yield for the 10-year in 16 years.
Analysts say that the higher yields are ushered by the Federal Reserve’s policy of keeping interest rates elevated. And that this will boost bond sales to cover deficits.
Inverted yield curve
When short-term rates are higher than long-term rates, an inverted yield curve results. An inverted yield curve can indicate an impending recession.
The yield curve has inverted before every recession since the 1970s, with recessions typically occurring within one year of inversion. However, the yield curve was also inverted during the 1960s with no subsequent recession. So while inversions typically precede recessions, recessions don’t always follow yield curve inversions.
Factors that affect the 10-year Treasury yield
Several factors can affect the yield on 10-year Treasury notes, including inflation and investors’ perceptions of the economy’s health.
The 10-year Treasury yield is very sensitive to leading macroeconomic indicators, such as the Bureau of Labor Statistics’ monthly consumer price index (CPI) and nonfarm payroll report, Remley says.
Since the 10-year Treasury’s coupon is fixed, a rise in CPI indicates higher prices and can cause investors to demand a higher yield on fixed-income securities to help maintain purchasing power.
On the other hand, a rise in the national unemployment rate tends to lower the 10-year Treasury yield as investors seek the relative safety of U.S. government-backed assets in times of uncertainty. This increased demand raises the price of Treasury securities, which are inversely related to yields. As prices rise, yields go down.
Yields can also be affected by mere perception rather than actual economic changes. Investors who believe a downturn is imminent may expect the Federal Open Market Committee to lower future rates to provide more accommodative monetary policies. In anticipation of this, investors may lock in the current higher rates by buying long-term bonds. But since bond yields and prices are inversely related, as they bid up bond prices, the yields subsequently fall.
When investors feel confident in the economy, the reverse is true: Investors are less inclined to seek the safety of Treasurys, prices fall from reduced demand and thus yields rise.
10-year Treasury yield over time
The 10-year Treasury yield has been climbing out of the hole it fell into in 2020 when rates dropped as low as 0.5% that year. This may not come as a surprise knowing how the Treasury yield is linked to inflation and that a period of low inflation culminated in 2020. This came to an end when the rise in prices caused by market problems from COVID-19 led to an uptick in inflation. It didn’t rise above 2%, the long-term rate of inflation, again until February 2022 when the CPI rose 7.9% from the same period one year prior.
It’s strange to think of 4% to 5% yields as enticing when looking back at the 10-year Treasury over time. In September 1981, when inflation rose 11.8% year over year, the 10-year Treasury yielded as much as 15.84%. It took a sharp drop over the next year as inflation began to subside, bottoming out at just over 10% in November 1982, only to spike again to nearly 14% by May 1984.
The 10-year yield continued to decline over the next year and a half.
Financial experts believe the drop was due to slowing economic growth, low inflation and cuts in oil prices, as well as investors’ rising willingness to invest in bonds.
When investors bid up bond prices, yields decline.
While the thought of having to settle for 5% may sound unfair when once upon a time investors were raking in nearly 16% on the safest investments in the U.S., double-digit inflation is not a healthy situation for the economy. So investors should largely be grateful for the decline.
How to buy 10-year Treasury bonds
You can buy 10-year Treasury notes directly from the U.S. Treasury at Treasurydirect.gov. You’ll need a TreasuryDirect account, which can be opened online for free. You must make purchases in $100 increments, with a first purchase of at least $100.
When buying directly from the U.S. Treasury, you can only dictate the amount of securities you want. You agree to whatever price and yield the government is offering. This is called a noncompetitive bid.
If you want to place a competitive bid, in which you can specify the price or yield, you’ll need to purchase through a bank, broker or dealer. While this could net you a better price or rate, you are not guaranteed to get the securities you want through a competitive bid. On the other hand, you are guaranteed to get the amount of securities you purchase noncompetitively.
You can also place noncompetitive bids for 10-year Treasurys through your bank or broker.
If you buy a newly issued security through TreasuryDirect, you’ll need to keep it in your account for at least 45 days — unless you purchased it with the proceeds from a mature Treasury security. After that, you can transfer it to another brokerage account or sell it.
Frequently asked questions (FAQs)
The 10-year Treasury can indicate investor confidence in the economy. For instance, if investors are flocking to safety by purchasing more 10-year Treasurys, this could signal that they anticipate worsening economic conditions.
Yes, 10-year Treasurys can be “a good investment if you are risk-averse and/or you believe that financial markets could face headwinds in the near-term future,” since they are known for being “safe havens” backed by the full faith and credit of the U.S. government, Curry says.
That said, other safe investments may offer higher yields and therefore be better choices, such as bank certificates of deposit that are FDIC insured and shorter maturity Treasury bills.
Similarly, 10-year Treasurys are not good investments if you seek capital appreciation, as these bonds won’t generate higher growth like stocks.
