Why is the 10-Year Treasury Note Important?

Paul R. Ruedi, CFP®

Though government debt obligations come in over a dozen different maturity lengths, the 10-year Treasury seemingly gets more attention than all the others combined. There are some very good reasons why this is the case. 

The 10-year Treasury plays a unique role in the modern global financial system. As it is often considered the “risk free rate” – a return an investor can receive with practically no risk, it serves as a hurdle rate or benchmark of the cost of borrowing in general. For example, corporate bond yields are priced by combining the risk-free rate plus an additional return or “spread” to compensate an investor for taking the excess risk of loaning their money to a business instead of the federal government. This also impacts stock valuations, as stocks must provide a return above and beyond the risk-free rate to attract investors.

Mortgage rates also closely follow the 10-year Treasury, which may be a surprise with mortgages often stretching out as long as 30 years. But the length of time people actually hold a mortgage before they refinance is closer to 10 years. This makes the 10-year Treasury the most sensible risk-free rate to which a premium can be added to attract investors to take on the additional risk of lending money to homebuyers. Student loans and other forms of long-term credit are impacted in a similar way. 

It also serves as a barometer of market expectations. Though the Federal Reserve can influence short-term rates with their policy decisions, longer-term treasury yields are driven by the buying and selling of bond investors. The collective buying and selling of all the participants in the bond market results in a market that is very good at incorporating all available information and expectations into prices and yields. Expectations about future interest rates, economic growth, inflation, and even government fiscal responsibility are all included in today’s bond yields and prices.

The 10-year treasury has been making headlines lately as yields rose to a notable threshold of 5% and are hovering around multi-decade highs. For borrowers who need to refinance or somebody who will soon need a mortgage to buy a house, this could be a headwind. But for future bond investors, the ability to lock in a 5% yield for 10 years in Treasuries could be an opportunity we haven’t seen in a long time. It really depends on your personal situation. If you need help understanding how interest rates impact your personal finances, you may want to talk to a financial advisor.

Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.