Financial Literacy

What is a 10-Year Treasury Note?

If you’re interested in debt securities, one of the first products you’ll need to get familiar with is a 10-year treasury note. What is a 10-year treasury note? On the surface, it’s one of the most stable types of debt securities out there—after all, it’s backed by the U.S. Government. It matures over a period of 10 years, and pays a dividend every six months during that period. After a decade, holders can redeem it for the face value of the note. 

Even more important than its intrinsic value is its function. The 10-year treasury note is the gold standard (so to speak) of interest rates. Nearly every United States lending institution derives its interest rates by benchmarking the 10-year treasury note. This makes it both a powerful investment tool and a financial barometer for evaluating other types of investments—including debt securities. 

What is a Treasury Note?

A treasury note—also called a T-note—is a marketable debt security issued by the United States government. These securities come with a fixed interest rate and reap the benefit of interest payments every six months until maturity. They come in variations of one-, three-, five-, seven- and 10-year treasuries. The most popular is the 10-year treasury note, which is widely tracked and benchmarked for other interest-related products, such as mortgages. 

It’s possible to buy T-notes directly from the federal government. That said, most investors acquire theirs through secondary bond markets. This allows them to buy and hold bonds to collect interest payments, and sell them in times when they need liquidity. 

Treasury Notes vs. Bonds vs. Bills

The biggest difference between treasury notes (T-notes) and bonds (T-bonds) is their duration. Where T-notes mature in 10 years or less, T-bonds start at 10 years and go up to 30. These both differ from treasury bills (T-bills), which mature in less than a year. Because these financial products function similarly, they’re collectively known as “treasuries.” They’re a product more often pursued by institutional investors, as part of a diversified portfolio. 

Get Familiar With Treasury Rates

The interest rates for treasuries change daily. This is because these securities reflect economic sentiment and dictate bullish or bearish outlooks across the wide range of financial instruments that track them. Each type of treasury has its own interest rate, contingent on the length of the investment. This affects how investors see them.

The reason the 10-year treasury note is such a popular financial metric to track is because it represents an intermediate time horizon. In the context of something like mortgage rates (which track 10-year treasury note rates), interest rates give investors a look at the long-term picture of their investment and possible ROI. Mortgage securities aren’t the only things that track the 10-year treasury note:

  • Auto loans
  • Corporate bond rates
  • Credit card annual percentage rates
  • Personal loan rates
  • Savings interest rates
  • Student loan rates

These are financial products that everyday investors interact with on a regular basis. That means a rise or fall in the 10-year outlook on T-notes has rippling impact that trickles past investment funds. This is true for international investors, as well. 10-year rates tie into numerous financial instruments in markets across the world. 

The Benefits of Investing in Treasury Notes

The biggest benefit of investing in treasury notes is their security. The 10-year treasury note comes with the full guarantee of the United States government, which means the risk of default is virtually nonexistent.

The interest payments generated by treasury notes are also exempt from state and local income tax. Instead, they’re taxed only at the federal level. For those seeking passive income, treasury notes can be a nice supplement to a dividend portfolio. 

Finally, there aren’t any minimum ownership terms associated with treasuries. This means investors can sell them to another buyer before maturity if they so choose. In fact, there’s an entire secondary market of treasury note buyers, comprised of those with the patience and time horizon to wait for the notes to mature. 

Disadvantages of 10-Year Treasury Notes

The biggest downfall of 10-year treasury notes is their abysmal return. As debt securities, they’re typically only considered in bear markets—and even then, they’ve averaged well under 6% returns since 2000. Investors typically buy them as part of a diversified portfolio, and even then, usually through a fund that tracks 10-year treasury notes, rather than investing in them directly. 

The other disadvantage of 10-year treasury notes is their maturity timeline. While six-month interest payments are nice, you’re not getting your principal back for a decade. For many investors, that’s a long time to have money tied up in a low-yield investment. 

The Bottom Line of 10-Year Treasury Notes

While they’re a far cry from respectable returns, 10-year treasury notes do serve an important purpose. What is a 10-year treasury note good for? The best answer is setting interest rates for other debt securities. That, and they’re the ultimate safe investment because they’re backed by the U.S. government. You won’t see market-beating returns from these investments, but they’re a good hedge in bear markets or if you’re interested in passive revenue generation. 

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As a retail investor, you’re likely not going to buy 10-year treasuries—at least, not outright. Instead, they’re worth paying attention to as a key metric for tracking other interest rates. Use them for what they are: a barometer for understanding why other debt securities behave the way they do.


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