If you follow market news, you will see the 10-year Treasury yield mentioned constantly. It is one of the most important prices in the world because it sets a baseline for borrowing costs and for how investors value almost every other asset.
What the 10-year yield is
The US Treasury borrows money by issuing bonds of various maturities. The 10-year note pays a fixed interest rate for ten years. After it is issued, it trades freely in the market, and its price moves up and down. The yield is the annual return an investor would earn by buying the note at today’s price and holding it to maturity. Bond prices and yields move in opposite directions: when prices fall, yields rise.
What drives it
Economists break the 10-year yield into roughly three parts:
- Expected short-term rates: what investors think the Federal Reserve’s policy rate will average over the next decade.
- Expected inflation: lenders want compensation for the loss of purchasing power over the life of the bond.
- Term premium: extra compensation for the risk of locking money up for a long period, including uncertainty about inflation and government borrowing.
Unlike short-term rates, the Fed does not set the 10-year yield directly. It moves with economic data, inflation expectations, government debt supply, and global demand for safe assets.
Why stock investors care
It is a benchmark discount rate
Analysts value stocks by discounting future cash flows. The 10-year yield is a common starting point for that discount rate. When it rises, future profits are worth less today, which pressures valuations. Growth companies, whose profits lie further in the future, tend to be most sensitive.
It competes with stocks
A higher risk-free yield makes bonds more attractive relative to stocks. Analysts sometimes compare the stock market’s earnings yield, the inverse of its P/E ratio, with the 10-year yield to gauge how much extra return stocks offer for their extra risk. This gap is a rough version of what economists call the equity risk premium.
It drives real-economy borrowing costs
Thirty-year fixed mortgage rates in the US tend to track the 10-year yield plus a spread. Corporate bond yields also build on Treasury yields. Higher long-term yields therefore affect housing activity and corporate financing costs.
The yield curve
Comparing yields across maturities gives the yield curve. Normally, longer bonds yield more than shorter ones. When short-term yields rise above long-term yields, the curve is “inverted.” Inversions, often measured by the gap between the 2-year and 10-year yields, have preceded many past US recessions, although the timing between inversion and recession has varied widely and the signal is not infallible.
How to read its moves
A rising 10-year yield is not automatically bad for stocks. Yields rising because growth expectations are improving can coincide with a healthy market. Yields rising because of inflation fears or concerns about government debt are usually more troublesome. Look at why yields are moving, and watch inflation-protected Treasury yields, known as real yields, which strip out inflation expectations and are closely linked to growth-stock valuations.
For the short-term side of the rate story, read how interest rates move the stock market.
