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10-Year Treasury Note and Rate

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10-year Treasury

10-year Treasury note rates are the benchmark for all other interest rates. (Credit:U.S. Treasury Dept.)

The 10-year Treasury note is essentially a loan you make to the U.S. government. It is one of the U.S. Treasury bills, notes and bonds, and it's the only one that matures in a decade.

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:

The 10-year Treasury note is auctioned by the U.S. Treasury Department. The note is the most popular debt instrument in the world. That's because it's backed by the guarantee of the powerful United States economy. Compared to most other countries' sovereign debt, there is very little risk of a U.S. debt default. This is true, even though the current U.S. debt is nearly 100% 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 normally get worried about a the country's ability to pay when the ratio is more than 77%. It's not a problem when it only lasts for a year or two, but can really depress growth if it lasts for decades. (Source: World Bank, Finding the Tipping Point

However, since the U.S. can always print more dollars, there's virtually no reason it eve needs to default. The only way it could is if Congress didn't raise the debt ceiling, basically forbidding the U.S. Treasury from issuing new Treasury notes. 

How Do Treasury Rates Work?:

A low rate on the 10-year Treasury note means there is a lot of demand for it. This seems counterintuitive -- wouldn't more people want it if the rate were higher? However, Treasuries are initially sold at auction by the Treasury Department, which sets a fixed face value and interest rate. It's easy to confuse the fixed interest rate with the yield on the Treasury. It's even easier because most people refer to the yield as the Treasury rate. When people say "the 10-year Treasury rate," they don't mean the fixed interest rate paid throughout the life of the note. They mean the yield.

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.

Treasury rates change every day, because they are resold on the secondary market. Hardly anyone keeps them for the full term. Therefore, if you hear that bond prices dropped, then you know there is not a lot of demand for Treasuries, and that rates have increased.

How the 10-Year Treasury Note Affects You:

As rates on the 10-year Treasury note rises, so do the interest rates on 10-15 year loans, such as the 15-year fixed-rate mortgages. That's because 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 drop and still remain competitive. However, their rates will always be a bit higher than Treasuries, because they must compensate investors for their higher risk of default. Second, even if 10-year Treasury note yields dropped lower, mortgage interest rates probably won't fall much lower. Lenders have processing costs they've got to cover even if Treasury yields drop to zero.

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:

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 of time. This is known as the yield curve.

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:

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 short-term Treasury bill to the longest-term Treasury bond. The 10-year note is somewhere in the middle, so it gives an indication of how much return investors need to tie up their money for ten years. If they think the economy will do better in the next decade, they will need a higher yield to keep their money socked away. When there is a lot of uncertainty, they don't need much to keep their money safe.

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 October 1, 2013 the yield curve was:

  • 0.02% for the 3-month Treasury bill,
  • 0.10% for the 1-year Treasury note,
  • 2.66% for the 10-year Treasury note,
  • 3.72% for the 30-year Treasury bond.

This is a fairly normal yield curve. Investors need 3.73 percentage points more to keep their money tied up for 30 years vs three months. On the other hand, 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. (Source: U.S. Treasury Department, Daily Treasury Yield Curve Rate)  Article updated October 15, 2013

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