How Does the 10-Year Treasury Bond Work?
The U.S. government borrows money to fund government operations through the sales of Treasury bills, notes and bonds. Treasury bonds are considered to be the safest income investment in the world. Officially, only the 30-year maturity security is called a bond. The 10-year Treasury is technically a note, but the terms "note" and "bond" are used interchangeably. The 10-year Treasury note is a popular barometer for the current, long-term, risk-free interest rate.
Other People Are Reading
-
Features
-
The 10-year Treasury note is issued with face amounts in multiples of $100. Interest is fixed when the bonds are issued and paid to the bond holders every six months. The Treasury sells new notes every month, so there are 10-year notes available that pay interest every month of the year. For example, notes issued in January will pay interest in July and January. The next month the new notes sold will have August and February as interest payment months. Treasury notes are only issued in electronic form.
Features
-
The Treasury sells 10-year notes through an auction process. Large institutional investors put in bids for the yield they are willing to accept and how much of the current issue they want to buy at that yield. Investors can also put in a non-competitive bid to purchase the number of Treasury notes they want at the yield determined by the competitive bid process. Treasury notes are also widely traded on the secondary market. Investors who want to buy Treasury notes can do so easily through banks and brokers.
-
Effects
-
The 10-year Treasury note yield is determined by market forces through the auction process and the yields investors accept in the secondary markets. Once a note is issued, the semiannual interest payment is fixed and the market adjusts for changing interest rates with changing bond prices. Rising interest rates will cause the market price of issued 10-year Treasurys to fall in value. Falling rates result in higher bond prices. Treasury note owners always have the option to hold the bond until maturity and receive the full face amount from the Treasury.
Potential
-
Treasury notes can be purchased through banks, investment brokers, dealers or from the Treasury website at Treasurydirect.com. Competitive bids must be made through a broker, dealer or bank. Notes purchased through TreasuryDirect will be priced at the non-competitive bid yield. The 10-year Treasury note is a risk-free, long-term income investment. Interest earned from Treasury securities is exempt from state income taxes.
Considerations
-
The 10-year Treasury yield is the benchmark and basis for many financial indexes and products. Corporate bonds are evaluated on their yield above the Treasury. Thirty-year mortgage rates are closely tied to the 10-year Treasury rate. As a market-derived interest rate, the 10-year Treasury rate can give investors an idea what the market believes will happen to inflation and interest rates in the future.
-
References
Resources
- Photo Credit Department of Treasury Building image by dwight9592 from Fotolia.com
