10-Year Treasury Bond Yields
The 10Y Treasury note is a type of bond issued by the US Federal government to fund itself. Treasuries are a loan investment , which means investors loan money to the US 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 maturity of one to 10 years and bonds have a maturity greater than 10 years. Typically the longer the maturity, The higher the yield. 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 purchasing10-year Treasuries to understand why this rate is important. Yield is driven by supply and demand. When times are tough, and there is volatility in the stock market, investors often choose to move more money. Treasuries are considered one of the safest investments of the world because they are backed by the full faith and credit of the US government. This flight to safety pushes the prices of those bonds up because investors are willing to pay more for the smaller yield. When the economy is doing well, and their 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 also acts as an economic indicator because its part of the yield curve.
The importance of the 10-year Treasury bond yield goes beyond just understanding the return on investment (ROI) for the security. The 10-year is used as a proxy for many other important financial matters, such as mortgage rates.
This bond also tends to signal investor confidence. The U.S Treasury sells bonds via auction and yields are set through a bidding process.2 Prices for the 10-year bond drop when confidence is high, which causes yields to rise. This is because investors feel they can find higher-returning investments elsewhere and do not feel they need to play it safe.
But when confidence is low, bond prices rise and yields fall, as there is more demand for this safe investment. Put simply, falling yields indicate caution in the markets. This confidence factor is also felt outside of the U.S. as it points to the future of the global economy. The geopolitical situations of other countries can affect U.S. government bond prices, as the U.S. is seen as safe haven for capital. This can push up prices of U.S. government bonds as demand increases, thus lowering yields.
Another factor related to the yield is the time to maturity. The longer the Treasury bond's time to maturity, the higher the rates (or yields) because investors demand to get paid more the longer their money is tied up. Short-term debt typically pays lower yields than long-term debt, which is called a normal yield curve. But at times, the yield curve can be inverted with shorter maturities paying higher yields.