10 year treasury note: Meaning, Criticisms & Real-World Uses

What Is 10-Year Treasury Note?

The 10-Year Treasury Note is a debt obligation issued by the United States Department of the Treasury with a fixed maturity of 10 years from its issuance date. As a core component of fixed income securities, these notes are considered among the safest investments globally, backed by the full faith and credit of the U.S. government. They pay interest at a fixed coupon rate semi-annually until maturity, at which point the investor receives the par value of the note²³. The U.S. government utilizes the funds raised from the sale of 10-Year Treasury Notes to finance its ongoing expenditures and manage the national debt²².

History and Origin

Treasury notes, in various forms, have been part of U.S. government finance since the 19th century, often used to fund periods of financial stress like wars. The modern 10-Year Treasury Note, as specifically defined with a maturity of at least one year but not more than 10 years, was first formally offered in 1976 under new legislation. This legislation also exempted these notes from a historical 4-1/4% interest rate ceiling that applied to longer-term Treasury bonds²¹. Prior to this, Treasury notes had been redefined in statute in 1967 to mature in one to seven years²⁰. Since 1986, the U.S. Treasury transitioned to a computerized book-entry system for issuing securities, later launching the TreasuryDirect website in 2002 for direct online purchases by individual investors, moving away from engraved paper certificates. Currently, 10-Year Treasury Notes are auctioned quarterly in February, May, August, and November, with additional "reopenings" in other months¹⁹.

Key Takeaways

The 10-Year Treasury Note is a debt instrument issued by the U.S. Treasury with a 10-year maturity.
It pays fixed interest semi-annually and repays the principal at maturity.
Considered one of the safest investments due to U.S. government backing.
Its yield is a widely used benchmark for other interest rates, including mortgage rates.
Can be purchased directly from the U.S. Treasury via TreasuryDirect or through financial institutions.

Formula and Calculation

The price and yield of a 10-Year Treasury Note are inversely related: as prices rise, yields fall, and vice versa. The present value of a bond, which determines its market price, is calculated as the sum of the present values of all future coupon payments and the par value repaid at maturity.

The formula for the price of a bond is:

P = \sum_{t=1}^{N} \frac{C}{(1+r)^t} + \frac{F}{(1+r)^N}

Where:

(P) = Current market price of the bond
(C) = Semi-annual coupon payment ((F \times \text{Coupon Rate} / 2))
(r) = Semi-annual yield to maturity (discount rate)
(N) = Total number of semi-annual periods until maturity (years to maturity (\times 2))
(F) = Face value (par value) of the bond

The yield to maturity (YTM) is the total return an investor can expect if they hold the bond until maturity, assuming all interest payments are reinvested at the same rate. This is typically found through iterative numerical methods rather than a direct algebraic solution.

Interpreting the 10-Year Treasury Note

The yield of the 10-Year Treasury Note is a crucial economic indicator and is frequently tracked by investors and analysts. It represents the return investors demand for lending money to the U.S. government for a decade¹⁸. This yield is often seen as a proxy for the market's long-term interest rate expectations and can reflect market sentiment regarding future economic growth and inflation risk.

A rising 10-Year Treasury Note yield can signal expectations of stronger economic growth or rising inflation, prompting the Federal Reserve to potentially raise the Federal funds rate or indicating that investors anticipate higher returns to compensate for increased inflation. Conversely, a falling yield may suggest concerns about economic slowdowns or expectations of lower inflation. The position of the 10-Year Treasury Note yield within the overall yield curve (which plots yields against maturities) offers insights into market expectations for future economic conditions, with an inverted yield curve often signaling potential recessionary pressures¹⁷.

Hypothetical Example

Consider an investor, Sarah, who buys a newly issued 10-Year Treasury Note with a par value of $1,000 and a coupon rate of 3% per year.

Initial Purchase: Sarah purchases the 10-Year Treasury Note at its par value of $1,000.
Coupon Payments: Since the coupon rate is 3% and payments are semi-annual, Sarah receives ( (0.03 \times $1,000) / 2 = $15 ) every six months. Over the 10-year life of the note, she will receive 20 such payments.
Maturity: After 10 years, the note matures, and Sarah receives the $1,000 par value back, in addition to her final $15 coupon payment.

If interest rates in the market rise after Sarah buys her note, the market price of her existing 10-Year Treasury Note will likely fall if she decides to sell it on the secondary market before maturity, as new notes will be issued with higher coupon rates, making her 3% note less attractive.

Practical Applications

The 10-Year Treasury Note is more than just a government debt instrument; its yield serves as a benchmark for a wide array of financial products and economic analyses:

Mortgage Rates: The yield on the 10-Year Treasury Note is a key indicator for fixed-rate mortgage rates. Lenders often base their mortgage offerings on this yield, meaning fluctuations in the 10-Year Treasury Note yield can directly impact the cost of home loans for consumers¹⁶. For example, data from Freddie Mac's Primary Mortgage Market Survey frequently highlights the relationship between the 10-year Treasury yield and average fixed mortgage rates.¹⁴, ¹⁵
Corporate Debt: The interest rates for corporate bonds and other corporate debt instruments are frequently priced relative to the corresponding Treasury yield of similar maturity.
Economic Forecasting: Economists and financial analysts closely monitor the 10-Year Treasury Note yield as an indicator of future economic activity and inflation expectations.
Valuation Models: In finance, the yield of the 10-Year Treasury Note is commonly used as the "risk-free rate" in valuation models such as Discounted Cash Flow (DCF) analysis and for calculating the Weighted Average Cost of Capital (WACC) for companies¹², ¹³.

Limitations and Criticisms

While 10-Year Treasury Notes are renowned for their safety, they are not without limitations and risks for investors.

Interest Rate Risk: This is the primary risk associated with fixed income investments like the 10-Year Treasury Note. If market interest rates rise after an investor purchases a note, the market value of the existing note will fall. This means if an investor needs to sell the note before maturity, they might receive less than the par value ¹⁰, ¹¹. The longer the maturity of a bond, the greater its sensitivity to changes in interest rates⁹.
Inflation Risk: Although the U.S. government guarantees timely payments of principal and interest, the purchasing power of those fixed payments can be eroded by inflation over time⁷, ⁸. If inflation increases unexpectedly, the real return from a 10-Year Treasury Note can diminish.
Yields: Compared to riskier assets like equities or even some corporate bonds, the 10-Year Treasury Note typically offers lower yields, reflecting its perceived safety and the U.S. government's minimal default risk ⁵, ⁶. Investors seeking higher returns may find the yields insufficient, prompting them to consider other forms of diversification to balance risk and return.

10-Year Treasury Note vs. Treasury Bond

The primary distinction between a 10-Year Treasury Note and a Treasury Bond lies in their respective maturities. Both are marketable securities issued by the U.S. Treasury, pay fixed interest semi-annually, and are backed by the full faith and credit of the U.S. government. However, Treasury Notes have maturities ranging from two to 10 years, with the 10-Year Treasury Note being the longest maturity within this category⁴. Treasury Bonds, conversely, have significantly longer maturities, typically 20 or 30 years³. Due to their longer maturities, Treasury Bonds generally carry more interest rate risk than 10-Year Treasury Notes, as their prices are more sensitive to changes in prevailing interest rates over a longer period. Historically, the 10-year Treasury Note has gained prominence as a key benchmark, sometimes replacing the 30-year Treasury bond as the most-followed metric in the U.S. bond market, especially during periods when the 30-year bond issuance was suspended or less frequent².

FAQs

Q: How do I buy a 10-Year Treasury Note?
A: You can purchase 10-Year Treasury Notes directly from the U.S. government through the TreasuryDirect website, which offers a convenient online platform for individual investors. Alternatively, you can buy them through a bank or a brokerage firm. These notes are typically sold via auctions.

Q: Are 10-Year Treasury Notes tax-exempt?
A: Interest earned on 10-Year Treasury Notes is exempt from state and local income taxes but is subject to federal income tax¹. This tax treatment can make them particularly attractive to investors in states with high income taxes.

Q: What is the yield of a 10-Year Treasury Note?
A: The yield of a 10-Year Treasury Note refers to the total return an investor receives over the life of the bond, considering its coupon rate, purchase price, and time to maturity. This yield fluctuates daily on the secondary market based on supply, demand, and economic expectations, making it a dynamic indicator of market conditions.