The 10-year Treasury note rate is the yield, or rate of return, you get for investing in this note. The rate is important because it is the benchmark rate that guides almost all other interest rates. The exception is adjustable rate mortgages, which tend to follow the Fed funds rate. However, even the Federal Reserve watches the 10-year Treasury rate before making its decision to change the Fed funds rate. That's because the 10-year Treasury note, like all other Treasuries, is sold at an auction. Therefore, the rate indicates the confidence investors have in economic growth.
The 10-Year Treasury Note:
How Do Treasury Rates Work?:
Treasury products are sold to the highest bidder, whether at 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 recession phase of the business cycle. That's exactly what you want to see, because this will drive bank lending rates, and all other interest rates, down. This provides greater liquidity right when the economy needs it.
When there's a bull market, or the economy is headed in the expansion phase of the business cycle, there are plenty of other investments which are relatively safe. Investors are looking for more return than a 10-year Treasury note will give. Therefore, there's not a lot of demand, and bidders are only willing to pay less than the face value. In that case, the yield is higher. Treasuries are being 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.
How the 10-Year Treasury Note Affects You:
How does this affect you? Well, it makes it cost less to buy a home because now you've got to pay the bank less interest to borrow the same amount. As homebuying becomes less expensive, demand should rise. As the real estate market strengthens, it has a positive affect on the economy, increasing GDP growth. However, the glut of foreclosures on the market has weighed down home prices.
Why the 10-Year Treasury Hit Record Lows:
On June 1, 2012, the 10-year Treasury rate hit an intra-day low of 1.442 percent, the lowest rate since the early 1800s. Investors were spooked by the eurozone debt crisis and a low jobs report. They responded by putting their money into the traditional safe haven, the 10-year Treasury. Investors have not really recovered their confidence from the 2008 financial crisis. As a result, the 10-year note yield is lower than it was in 2008. (Source: Reuters, Weak jobs data knock U.S. yields lower, June 1, 2012)
The 10-Year Note and the Treasury Yield Curve:
Normally, 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 June 1 the yield curve was:
- .07 for the 3-month Treasury bill,
- .17 for the 1-year Treasury note,
- 1.47 for the 10-year Treasury note, and
- 2.53 for the 30-year Treasury bond.
This is a fairly flat yield curve. Investors only need a few percentage points more to keep their money tied up for longer. When investors demand more return in the short term than in the long term, that's known as an inverted yield curve. That means they think the economy is headed for a recession. To find the current and historical 10-year Treasury rate, go to Daily Treasury Yield. (Article updated June 8, 2012)