Overview
The 10-year Treasury note is a debt obligation issued by the U.S. government that matures 10 years from its issuance date. This fixed-income security pays interest at a steady rate twice a year and furnishes the holder with the face value at maturity. By issuing these notes, the government partially funds its operations.
Key Takeaways
- T-notes for Long-term Savings and Investments: Treasury notes (T-notes) come with maturities up to 10 years, making them suitable for long-term financial planning.
- Liquidity in the Secondary Market: You don’t need to hold these notes until maturity; they can be sold anytime in the secondary market.
- Crucial Benchmark: The 10-year T-note is a pivotal government debt security closely monitored in financial markets.
- Inverse Correlation: T-note prices typically exhibit an inverse relationship with major stock market indexes.
Understanding 10-Year Treasury Notes
The U.S. government issues three primary debt instruments: Treasury bills, Treasury notes, and Treasury bonds, differentiated by their maturities. Treasury bills (T-bills) mature within a year, while Treasury bonds are longer-term securities that mature beyond 10 years. Treasury notes, including the 10-year variety, hit the maturity sweet spot of 1-10 years.
T-bills come at a discount to their face value and don’t offer periodic interest payments. Instead, the difference between their purchase price and the face value at maturity represents the interest earned.
The 10-Year Note Yield As a Benchmark
The yield of the 10-year T-note, the most closely watched government debt instrument, serves as a benchmark for myriad other interest rates in the economy, including mortgages and corporate debt.
Example
For instance, between March 2019 and March 2020, the yield saw a marked decline due to expectations from the Federal Reserve that interest rates would stay low or be further cut. This trend was exacerbated by the economic uncertainties caused by the COVID-19 pandemic. The yield hit an all-time low of 0.32% before gradually climbing back.
A rising 10-year T-note yield often signals market optimism about economic growth, which might imply higher borrowing costs. Conversely, a falling yield usually indicates economic concerns.
What Impacts the 10-year Treasury Yield?
Several factors shape the yield of the 10-year Treasury note:
- Investor Behavior: Lower demand raises yields when investors move to riskier assets, while higher demand lowers yields in troubled times.
- Inflation: Inflation erodes the fixed returns on these notes, causing yields to increase. Conversely, low inflation keeps yields stably low.
- Federal Reserve Policies: When the Fed raises interest rates, the yields on new issues of Treasury notes generally rise to reflect the increased cost of borrowing.
Advantages of Investing in Treasury Notes
T-notes offer an array of benefits:
- Given Security: With government backing, T-notes offer high safety levels and segment your portfolio, which enables diversification.
- Partial Tax-exemption: Coupon payments are exempt from state and local taxes but are subject to federal taxation.
- Flexible Holding Terms: Investors can hold until maturity or sell in the secondary market without any minimum holding length.
Disadvantages of Investing in Treasury Notes
Despite the array of advantages, there are certain drawbacks:
- Lower Yield Compared to Riskier Assets: T-notes generally offer lower returns than equities or high-yield bonds.
- Inflation: High inflation reduces the purchasing power of the fixed interest payments, possibly leading to negative real returns.
- Interest Rate Risk: An increase in new issuance yields decreases the market value of existing T-notes.
How to Buy 10-year Treasury Notes
The U.S. Treasury sells its notes through the TreasuryDirect website, banks, or brokers. The bidding can be competitive or noncompetitive, starting at a minimum purchase of $100 and increasing in $100 increments. All Treasuries are now issued electronically.
Schedule of Issuance
The Treasury issues new 10-year notes every February, May, August, and November, with reopenings offering additional notes in other months. These reopened notes have the same maturity date and coupon rate as the originals but different issue dates and market-reflective prices.
Buying Tips
Treasury bills can be bought from most banks, but buyers should consider possible extra expenses, such as sales commissions.
The Bottom Line
The 10-year Treasury note is a reliable, fixed-return investment with low risk, with semi-annual interest payments and state and local tax exemptions. They offer a haven against more volatile market assets.
Related Terms: T-bills, Treasury bonds, Security Yield, Federal Reserve, monetary policy.
References
- TreasuryDirect. “Treasury Bills”.
- TreasuryDirect. “Treasury Notes”.
- TreasuryDirect. “Treasury Bonds”.
- CNBC. “10-Year Treasury Yield Hits All-Time Low of 0.318% Amid Historic Flight to Bonds”.
- YCharts. “10 Year Treasury Rate”.
- IRS. “Topic No. 403, Interest Received”.
- TreasuryDirect. “Using Your Income Tax Refund to Buy Paper Savings Bonds”.
