A Guide to the 10-Year Treasury Yield

The yield on the highly watched interest rate benchmark is at its lowest in a year.

The 10-year Treasury yield rivals the S&P 500 index as the most watched benchmark in the investment universe today, and for good reason, as the key bond rate is a major component in various economic models, indicators and Federal Reserve policy decisions.

Learn how the 10-year Treasury bond rate works, why it matters, and see a list of top Treasury ETFs that track the 10-year Treasury rate.

What is the 10-Year Treasury Yield? 

The 10-year Treasury yield, often referred to as the "10-year yield" or "10-year bond rate," is the interest rate at which the United States government borrows money by issuing 10-year Treasury notes. It represents the yield or return that investors can expect to earn from holding these government-issued securities until maturity, which is 10 years in this case. The yield is expressed as an annual percentage. 

The 10-year Treasury yield is also a key benchmark and a significant indicator for various financial markets and the broader economy. For example, the 10-year Treasury yield serves as a reference point for setting interest rates for various financial products, including mortgages, corporate bonds, and other loans. When the 10-year yield rises or falls, it can influence borrowing costs throughout the economy. 

For this reason, investors often monitor the 10-year yield to assess its impact on equity markets. Higher yields can put downward pressure on stock prices, as they may make fixed-income investments more attractive relative to equities. In contrast, lower yields reduce corporate and consumer borrowing costs, which can help to stimulate the economy, but may also indicate a coming recession.

Is the 10-Year Treasury Risk-Free? 

While 10-year Treasuries are considered one of the safest investments available, they are not entirely without risk. The "risk-free" label for 10-year Treasuries primarily refers to their low default risk due to the backing of the U.S. government. This is because the U.S. government can tax, borrow, or print currency to meet its debt obligations. 

It’s also important for investors to keep in mind that, while the risk of default is minimal, 10-year Treasuries are subject to interest rate risk. The prices of existing bonds move inversely to changes in interest rates. If interest rates rise, the market value of existing bonds may decrease, potentially resulting in a capital loss if you need to sell before maturity. This risk primarily affects the market value of the bond and can be mitigated by holding the bond until maturity. 

Furthermore, 10-year Treasuries may not keep pace with inflation. The fixed interest payments mean that the purchasing power of those payments can erode over time if inflation exceeds the yield on the bond. 

How Does the 10-Year Treasury Work? 

The 10-year Treasury bond is a type of U.S. government bond with a fixed interest rate and a maturity period of 10 years. The process of how these securities has multiple layers, including the issuance, auction process and results, interest payments, and more. Treasury securities can be purchased directly through TreasuryDirect.gov.  

Here are key points on how the 10-year Treasury works: 

• Issuance: The U.S. Department of the Treasury, on behalf of the federal government, issues 10-year Treasury bonds through regular auctions. These auctions are held on a schedule and are open to various types of investors, including individuals, financial institutions, and foreign governments. 
• Auction process and results: The U.S. Treasury announces the details of each bond auction, including the issuance date, maturity date, and interest rate (coupon rate). After the auction closes, the U.S. Treasury determines the yield at which the bonds will be sold based on the bids received.  
• Interest payments: Once an investor owns a 10-year Treasury bond, they receive interest payments semi-annually. The interest rate is fixed and determined at the time of issuance. For example, if a 10-year Treasury has a 4% coupon rate, the investor will receive 2% of the bond's face value as interest every six months. 
• Maturity: The 10-year Treasury bond has a maturity period of 10 years from the issuance date. At the end of the 10-year period, the bondholder receives the face value of the bond, which is the amount originally invested.  
• Secondary market trading: After the bonds are initially issued, they can be bought and sold on the secondary market. The prices of existing bonds can fluctuate based on changes in market interest rates. If market interest rates rise, the market value of existing bonds falls, and if rates fall, bond prices generally rise. 
• Liquidity: Ten-year Treasuries are considered highly liquid, meaning they can be bought or sold relatively easily. The U.S. Treasury securities market is one of the most liquid bond markets in the world. 
• Taxation: The interest income from 10-year Treasuries is generally subject to federal income tax, but it is exempt from state and local income taxes. Investors may also be subject to capital gains tax if they sell the bonds at a profit before maturity. 

The 10-Year Treasury Rate and Investor Sentiment

Changes in the 10-year yield can reflect shifts in investor sentiment and risk appetite. When the yield rises, it may suggest higher expectations for economic growth and inflation. Conversely, a declining yield may indicate concerns about economic conditions and increased demand for safe-haven assets.  

Similarly, the 10-year yield is often used to gauge market expectations for future inflation. When the yield rises significantly, it can signal expectations of higher inflation in the coming years. A falling 10-year rate generally indicates expectations of lower inflation.

What are 10-Year Treasury ETFs? 

10-year Treasury ETFs are exchange-traded funds that track the performance of an underlying index of Treasuries with maturities of approximately 10 years. The 10-year Treasury fund’s benchmark index typically represents Treasuries with maturities of 10 years or longer, while others may cover a maturity range of seven to 10 years. For this reason, these funds are categorized as long-term bond ETFs. 

List of Top 10-Year Treasury ETFs by Assets Under Management

1. iShares 7-10 Year Treasury Bond ETF (IEF): $29.8 billion AUM, 0.15% expense ratio
2. Vanguard Long-Term Treasury ETF (VGLT): $13.8 billion AUM, 0.04% expense ratio
3. SPDR Portfolio Long Term Treasury ETF (SPTL): $10.7 billion AUM, 0.03% expense ratio
4. Schwab Long-Term US Treasury ETF (SCHQ): $726.1 million AUM, 0.03% expense ratio

Is the 10-Year Treasury a Good Beginner Investment? 

The 10-year Treasury bond is often considered one of the safest investment options available because it is issued and backed by the U.S. government. Thus, it’s typically seen as a low-risk investment with a relatively stable return. However, whether it's a good investment for a beginner depends on several factors, including the beginner's financial goals, risk tolerance, and investment horizon. 

For example, if a beginning investor’s primary goal is capital preservation and they have a low tolerance for risk, Treasuries may be suitable. However, if the investor is looking for higher returns, has a longer investment horizon, or is comfortable with some degree of risk, other investment options may be more appropriate. 

Some investors include Treasuries, or Treasury ETFs as one part of a well-rounded portfolio that includes a mix of asset classes, such as stocks and bonds, to balance risk and return.  

Pros and Cons of Investing in the 10-Year Treasury 

10-year Treasury bonds offer multiple benefits, such as safety of principal and steady returns, but investors are wise to consider some of the disadvantages of the 10-year Treasury, including low yields and interest rate risk.

Here are the pros and cons of investing the 10-year Treasury bond rate: 

Pros 

• Safety: U.S. Treasury bonds are not guaranteed investments, but they are considered one of the safest investment securities because they are backed by the full faith and credit of the U.S. government. They are often used as a benchmark for risk-free rates. 
• Steady returns: Treasury bonds offer a fixed interest rate, which means you can expect a predictable stream of interest income throughout the bond's life. 
• Liquidity: U.S. Treasuries are highly liquid and can be bought and sold easily in the secondary market. 
• Diversification: They can be a valuable component of a diversified investment portfolio, serving as a safe haven during market downturns. 
• Income generation: If you're looking for a source of regular income, Treasury bonds can provide that through their periodic interest payments. 

Cons 

• Low yields: While 10-year Treasuries are low risk, they also offer relatively low yields compared to other investments, such as stocks, corporate bonds, or real estate. This means the potential for lower returns. 
• Interest rate risk: Treasury bond prices are inversely related to interest rates. If interest rates rise, the value of existing bonds can decline, potentially resulting in a capital loss if you need to sell before maturity. 
• Inflation risk: The fixed interest payments may not keep pace with inflation, meaning the real (inflation-adjusted) return may be lower. 
• Opportunity cost: By investing in Treasuries, you may miss out on potential returns from other investments with higher risk, such as stocks or corporate bonds. 
• Long-term commitment: 10-year Treasuries have a long maturity period, which means your funds are tied up for a significant duration.  

The Bottom Line on the 10-Year Treasury Yield 

It's important to note that the 10-year Treasury yield is subject to fluctuations based on a wide range of factors, including changes in monetary policy, economic data releases, geopolitical events, and global market dynamics. Investors and financial professionals closely monitor this yield as it has a number of implications for the economy, including changes in borrowing costs for businesses and consumers. 

Investors often choose 10-year Treasury bonds for their relative safety and fixed interest payments. However, investors should be aware of interest rate risk, as the market value of existing bonds can fluctuate based on changes in market interest rates. Additionally, the yield on 10-year Treasuries may not keep pace with inflation, meaning the real return could be eroded over time.