Key Takeaways
- Medium-term U.S. government debt with 10-year maturity.
- Pays fixed semiannual interest; principal repaid at maturity.
- Considered ultra-low risk and highly liquid investment.
- Benchmark yield influences mortgages and economic indicators.
What is 10-Year Treasury Note?
The 10-Year Treasury Note is a medium-term debt security issued by the U.S. Department of the Treasury, offering a fixed interest rate paid semiannually over a 10-year period until maturity. Its yield serves as a critical benchmark in financial markets, influencing everything from mortgage rates to corporate bond pricing.
Investors view it as a safe haven investment due to its backing by the U.S. government and its role in signaling economic conditions.
Key Characteristics
Understanding the main features of the 10-Year Treasury Note helps you assess its fit within your portfolio.
- Fixed Coupon Payments: Pays interest every six months at a predetermined rate, returning the face value at maturity.
- Issuance: Sold via auction with a minimum purchase of $100, available electronically only.
- Market Pricing: Prices fluctuate based on interest rates and inflation expectations, affecting yield to maturity.
- Benchmark Role: Influences the par yield curve, guiding rates for mortgages and corporate bonds.
- Tax Advantages: Interest income is exempt from state and local taxes, though subject to federal tax.
How It Works
You buy a 10-Year Treasury Note either directly from the government or through a broker, receiving fixed semiannual interest payments until maturity. The note’s yield reflects its total return if held to the end, which fluctuates with market conditions like inflation and Federal Reserve policies.
The note’s average duration aligns closely with the Macaulay duration concept, balancing interest rate risk and return. This makes it a preferred choice for investors seeking predictable income with moderate duration risk.
Examples and Use Cases
Investors and institutions use the 10-Year Treasury Note in various ways to manage risk and optimize returns.
- Portfolio Diversification: Including bonds like BND or other best bond ETFs alongside 10-Year Notes can reduce overall volatility.
- Corporate Finance: Companies such as Delta monitor the 10-Year yield to gauge borrowing costs and economic outlook.
- Market Indicators: The shape of the par yield curve derived from these notes signals recession risks or growth opportunities.
- Tax Planning: Investors in high-tax states use these notes to benefit from their state and local tax exemptions while maintaining steady income.
Important Considerations
While the 10-Year Treasury Note offers safety and liquidity, its fixed payments are vulnerable to inflation, which can erode real returns. You should consider current inflation trends and interest rate forecasts before investing.
Also, compare duration and risk profiles with alternatives like shorter-term bills or longer-term bonds. For a broader bond investment approach, explore best low-cost index funds to complement your fixed income allocation.
Final Words
The 10-year Treasury note offers a low-risk, predictable income stream and serves as a key benchmark for financial markets. Monitor interest rate trends and inflation data to time your purchases effectively. Consider comparing current yields with other fixed-income options to optimize your portfolio.
Frequently Asked Questions
A 10-Year Treasury Note is a medium-term debt security issued by the U.S. Department of the Treasury that matures in 10 years. It pays a fixed interest rate semiannually and returns the principal at maturity.
The 10-Year Treasury Note pays interest twice a year through fixed coupon payments. These payments are made every six months until the note matures.
It is backed by the full faith and credit of the U.S. government, making it virtually free of default risk. Investors often turn to it during economic uncertainty for safety and capital preservation.
You can buy 10-Year Treasury Notes directly through TreasuryDirect.gov with a minimum purchase of $100. Alternatively, you can buy them via brokers or banks, which usually have higher minimums but offer easier trading on secondary markets.
The yield on the 10-Year Treasury Note serves as a benchmark for mortgage rates, corporate bonds, and economic indicators. Its yield curve helps signal growth expectations and recession risks.
Interest earned on 10-Year Treasury Notes is exempt from state and local income taxes, though federal taxes still apply each year. This makes them especially attractive for investors in high-tax states.
While very safe, 10-Year Treasury Notes typically offer low yields that may not keep up with inflation, potentially resulting in a zero or negative real return. Their prices and yields are also sensitive to changes in Federal Reserve policies and economic outlook.
10-Year Treasury Notes are highly liquid and actively traded in deep secondary markets. Additionally, futures contracts on the CME Group allow investors to hedge or speculate with low margin requirements.
