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Question of the Week: Why Do Markets Focus on the 10-Year Treasury Yield?

Written by The Inspired Investor Team | Published on April 29, 2021

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As a way of financing government spending, the U.S. Department of the Treasury issues multiple types of debt instruments. This includes Treasury notes (or T-notes), which have maturities ranging from two to 10 years. The 10-year Treasury yield you often see mentioned in the news is the yield for those specific notes – and it is the benchmark that guides other interest rates. It reflects market sentiment, and its movement can affect the performance of other asset types, such as stocks.

Because Treasury notes are issued and backed by the U.S. federal government and its massive financial reserves, they are safe investments, and the conservative yields they provide reflect that. When the economy is roaring and stock prices and other assets are steadily rising, investors often look elsewhere for stronger returns. However, when the markets are volatile and stock prices are heading downwards, Treasury notes are often used as a safe haven for investors.

Similar to other bonds, Treasury note yields fluctuate daily, influenced by inflation expectations and central bank activity in the future. The 10-year Treasury yield is a benchmark for borrowers – as yields rise, so might interest rates for mortgages, car loans and business loans.

In a nutshell, slowly rising yields can be a positive sign, as investors' confidence grows and they switch from bonds to stocks and other investments. But yields rising sharply due to increasing inflation can be a sign of trouble on the horizon for the economy and the stock market, as it suggests an expectation that central banks will need to cool economic activity to prevent overheating.

Interest rate hikes are often implemented to curb inflation, which makes capital more expensive, compressing the valuation of companies, while also hurting other markets such as real estate. Higher interest rates will hurt companies that typically hold more debt or have a high value placed on future cash flows.

Closer to home, investors often keep tabs on the five-year Government of Canada bond yield, which influences lending rates (in particular, the cost of five-year fixed-rate mortgages).

Current bond yields (Canadian and Treasuries) can be found on the bottom of your Markets Overview page.

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