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 node 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 1 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 us 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 yields for
longer term notes are lower than the
yield of the two-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 in 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 home buying or refinancing to
fund spending that can boost the economy
similarly the 10-year yield influences
rates at which businesses can borrow
higher rates 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
you