10-Year US Treasury Note

A debt obligation issued by the US Treasury Department with a maturity of 10 years

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What is the 10-Year US Treasury Note?

The 10-year US Treasury Note is a debt obligation that is issued by the Treasury Department of the United States Government and comes with a maturity of 10 years. It pays interest to the holder every six months at a fixed interest rate that is determined at the initial issuance. The US Government pays the par value of the note to the holder at the expiry of the maturity period. The issuer uses the funds collected to fund its debts and ongoing expenses, such as employee salaries.

10-Year US Treasury Note (from 1976)
Source: commons.wikimedia.org

Treasury notes are issued for a term not exceeding 10 years. The 10-year US Treasury note offers the longest maturity. Other Treasury notes mature in 2, 3, 5, and 7 years. Each of these notes pays interest every six months until maturity.

The 10-year Treasury note pays a fixed interest rate that also guides other interest rates in the market. For example, it is used as a benchmark for other interest rates such as Treasury bonds and mortgage rates. One exception is adjustable-rate mortgages, which are guided more by the Federal Funds rate. When setting the Federal Funds Rate, the Federal Reserve takes into account the current 10-year Treasury rate of return.

The yield on the 10-Year Note is the most commonly used Risk-Free Rate for calculating a company’s Weighted Average Cost of Capital (WACC) and performing Discounted Cash Flow (DCF) Analysis.

Investing in Treasury Notes

The 10-year US treasury can be purchased at auctions through competitive and non-competitive bidding. It is one of the most popular and most tracked debt instruments and is viewed as one of the safest investments. Even though the U.S. debt has a more than 100% debt to GDP ratio, the government is still considered unlikely to default on its obligations. Hence, the note is attractive to investors.

Investors who buy Treasury notes can choose to hold them until maturity or sell them on the secondary market. The US Treasury does not impose limitations on how long investors must hold these investments. Unlike Treasury notes with shorter maturities of 2 to 7 years, which are issued every month, the 10-year US Treasury notes are issued only in February, May, August, and November.

10-Year T-Note Chart

How the 10-Year US Treasury Note Works

Recession Phase

When markets are volatile, there is a high demand for 10-year US Treasuries as investors look for safe investments. When the debt instruments are sold at auctions by the US Treasury, the high demand often pushes investors to bid at or above the par value.

The investors are primarily looking for investments that will safeguard their funds, even though T-note yields are low. The yield is lower during the recession phase of the business cycle.

Expansion Phase

On the other hand, during an expansion phase of the business cycle, there is a low demand for 10-year Treasuries because other debt instruments are more attractive. At these times, investors look for higher return investments as opposed to safer investments. Since Treasuries provide a low rate of return, investors will put their money in alternative investments that will give them a higher yield.

Impact of Changes in Demand for T-Notes

The demand for 10-year Treasury Notes directly affects the interest rates of other debt instruments. As the yield on 10-year T-notes rises during periods of low demand, there will be an increase in interest rates on longer-term debt. Long-term debt that is not backed by the US Treasury must pay a higher rate of interest to compensate investors for the higher risk of default.

Importance of the 10-Year US Treasury Note

Financial Modeling and Valuation

The 10-year note is what most professionals in investment banking, equity research, corporate development, financial planning and analysis (FP&A), and other areas of finance use as the risk-free rate of return.

When calculating a company’s WACC, one of the assumptions that must be made in the cost of debt is the “risk-free rate,” which is usually equal to the yield on the 10-Year Treasury Note.

Below is an example of the WACC calculation:

10 Year Treasury Note in WACC, Financial Modeling

In cell E15 above, the cost of debt is equal to the yield on the 10-year Treasury Note.

Learn more in CFI’s financial modeling and valuation courses.

Investor Confidence

Demand for the 10-year US Treasury Note can show investor confidence in the state of the economy. When investors have high confidence in the performance of the economy, they look for investments with a higher return than the 10-year Treasury Note. This triggers a drop in the price of the T-Note, reflecting the lower level of demand.

In contrast, when investors have low confidence in the state of the economy, the demand for safer, government-backed 10-year T-notes increases, resulting in a price increase. The prices of less secure investments will decline because of their higher risk of default.

Economic Indicator

The 10-year US T-note is one of the most tracked treasury yields in the United States. Investors can assess the performance of the economy by looking at the Treasury yield curve. The yield curve is a graphic representation of all yields starting from the one-month T-bill to 30-year T-bond.

The 10-year T-note is located in the middle of the curve, and its yield indicates the return that investors require to tie up their money for 10 years.

Related Reading

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