The 10 Year Treasury – What it is and How it Works

10 year treasuryThe 10 year treasury is a debt obligation issued by the United States Treasury Department with a 10 year maturity. It is the most popular type of US Treasury debt and is often used as a barometer for the overall U.S. economy.

10 Year Treasuries can be purchased directly from the TreasuryDirect.com website via competitive or noncompetitive bidding with a minimum purchase of $100. They can also be purchased indirectly through your bank or broker.

How is the 10 Year Treasury Priced?

10 Year Treasury prices are determined by the following factors.

  • Face Value – (Sometimes called par) This is the price the government agrees to pay you upon maturity of the bond.
  • Dollar Price – The price you pay for the bond relative to the face value.
  • Interest Rate – The amount of interest the government agrees to pay you for the duration of the bond.
  • Yield – A combination of the dollar price and the interest rate for the duration of the bond, expressed as a percentage.

10 Year Treasury Bonds are sold at auction to the highest bidder. If demand is weak the notes will sell at a discount to face value, meaning you get a higher rate of interest. If demand is strong, they sell at a premium to face value, meaning you’ll get a lower rate of interest.  You can learn more about discount and premium here.

The interest rate combined with the dollar price over the duration of the bond is called the yield. The yield changes on a daily basis as the dollar price moves in relation to the face value . So if the dollar price rises the yield will fall and vice versa.

You are of course free to sell your Treasuries before maturity, in which case you’ll receive the current dollar price and NOT the face value. So contrary to popular belief it is possible to lose money on the 10 year treasury, if the current dollar price is below the price you paid.

What is the 10 year treasury rate?

The 10 year treasury rate is the yield to maturity (not the coupon rate) of the most recently auctioned 10 year treasury bond.  Yield to maturity is based on the market price of the bond and the coupon interest rate. This rate is widely reported in the financial media. For the current 10 year treasury rate and our forecast, click here.

How are 10 Year Treasury Bonds Paid?

The 10 year Treasury pays interest at a fixed rate once every six months and the full face value upon maturity. If you buy the bond when issued and choose to hold until maturity you’ll get back the face value of the bond plus the interest incurred over a ten year period.

 

The Difference Between Bills, Notes and Bonds

A 10 Year Treasury Bond isn’t actually a bond at all it’s a note. The difference between notes and bonds is basically the length of time until maturity.

  • Treasury bills are issued for terms less than a year.
  • Treasury notes are issued in terms of 2, 3, 5, and 10 years.
  • Treasury bonds are issued in terms of 30 years.

Bills, notes and bonds are collectively known as Treasuries.  You can learn more about the different types of treasuries here.

 

What’s The Difference Between Competitive and Noncompetitive Bidding?

10 Year Treasuries are bought at auction using either competitive or noncompetitive bidding. Competitive bidding is typically used by institutional investors. Here the investor states the rate or yield that is acceptable. The Treasury accepts competitive bids in ascending order of their rate or yield until the quantity of awarded bids reaches the amount of Treasury’s on offer.

Noncompetitive bidding is typically used by smaller investors. The price that a noncompetitive bidder pays is the average bid price of all competitive bids. When bidding noncompetitively you don’t have to specify the rate or yield you’re willing to pay, but you’re limited to a maximum of $5 million in a single auction. You can learn more about the treasury auction process here.

 

The 10 Year Treasury As A Barometer For The Economy

A lot can be learned about the direction in which the economy is heading by looking at the Treasury yield curve. The yield curve is a comparison of yields across the entire spectrum of Treasury’s, from 3 month bills to 30 year bonds.  Because the 10 Year Treasury Bond sits in the middle of this spectrum, it gives an indication of how much return investors require to tie up their money for 10 years. If investors think the economy will be bullish over the next decade, they will require a higher yield to keep their money tied up in bonds. When there is a lot of uncertainty in the market, they don’t require quite so much to keep their money safe.

When long term yields fall below short term yields, it’s known as an inverted yield curve. That means investors think the economy is heading for a recession.  You can learn more about the yield curve here.

  Want to learn how to generate more income from your portfolio so you can live better?  Get our free guide to income investing here.
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