What Is The 10-Year Yield And How Do You Trade It?

In global debt markets, the US reigns supreme. It’s not too dissimilar to the stock markets in that respect. But global bond markets are actually enormous in scale, worth over US$140 trillion ^[1]. 

Within the debt landscape, the US Treasury market is the heavyweight. It’s seen as the most liquid bond market in the world by some stretch. Because of that, it’s also used heavily by institutional, as well as retail, investors for a variety of investment needs. 

The “go-to” tenor in the world of US Treasuries is the 10-Year Treasury, also known simply as the 10Y Treasury. But what exactly is it and how do you trade it?  

Key Points 

• The US 10-Year Treasury is a globally recognised benchmark for assessing economic health, interest rates, and investor sentiment. 

• Its yield influences everything from mortgage rates to stock valuations, making it a key driver of financial markets. 

• Traders and investors can use the 10-Year Treasury both as a long-term safe haven and a short-term trading instrument based on market conditions. 

What is the 10-Year Treasury? 

The 10-year US Treasury note is widely regarded as one of the safest investments available not only in the American financial markets, but globally too. It often serves as a benchmark for comparing the risk and return of other assets and forms of debt—alongside instruments like the 3-month Treasury bill.  

Although no investment is entirely without risk, Treasury notes are widely regarded as low-risk if they’re held to maturity. Investors often monitor demand for these notes in order to get an accurate gauge of both market and economic sentiment.  

Treasury notes are one of four primary types of US government debt instruments. The other three include Treasury bills, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS). All these are easily accessible through ETFs, with each differing in terms of maturity, interest payments, and yield. 

A fair amount of the US Treasury market is owned by foreign nations, with the largest foreign holders of 10-Year Treasuries being Japan and China.  

Importance of US 10-Year Treasury yields 

The 10-Year Treasury yield’s importance is due to its role as one of the safest investment benchmarks. It’s used as the gold standard by investors when evaluating the relative risk and potential return of other assets. 

In addition, Treasury yields influence broader interest rates, including consumer borrowing like mortgages and real estate loans–which affect how the housing market functions. Many investors will consider the returns on offer from the 10-Year Treasury against alternatives like money market accounts, corporate bonds, and mortgage-backed securities. This can also impact the average consumer or homeowner. 

As yields on 10-Year Treasuries rise, borrowing costs—especially for home loans—typically increase as well. 

Moreover, the demand for Treasuries often shifts based on economic conditions. During periods of uncertainty or market volatility, investors tend to favour Treasuries due to their perceived relative safety. Conversely, when economic confidence is high, they may turn to riskier assets in pursuit of potentially higher returns.  

However, when economic growth is peaking and inflation starts to rise, there is a risk of higher interest rates. Why? That’s down to the US Federal Reserve and its interest rate policy. The US central bank may hike the Fed Funds rate to curb inflation, resulting in funds flowing into assets that offer higher yields.  

Benchmark interest rates 

The 10-year US Treasury yield is a widely followed benchmark in global markets, reflecting expectations for economic growth, inflation, and Fed policy.  

It is often used as a reference point for pricing other assets, influencing mortgage and loan rates, signals investor sentiment, and affecting global borrowing costs and capital flows. In short, the 10-Year yield can offer insights to track fund flows, not just in the US market but globally.  

Economic health 

How does the economic outlook impact the 10-Year yield? Well, optimism about economic growth can contribute to higher Treasury yields, as markets may anticipate increased inflation and potential interest rate hikes.  

In contrast, sluggish growth or peak economic conditions can lead some investors to favour Treasuries, which are often viewed as relatively lower-risk assets. This may boost prices and lower yields, due to the inverse relationship between bond prices and yields (if one goes up, the other typically goes down). 

Impact on financial markets 

The US 10-Year Treasury is a big barometer of how global financial markets are functioning. That’s because it’s used as a baseline for the valuation of other financial assets. If investors can earn a decent yield by parking funds in the 10-Year Treasury, they may prefer it over riskier investments offering only slightly higher returns. 

As a result, stock markets can be influenced by the 10-Year Treasury yield that’s on offer. If the yield is low, it can make stocks look more appealing because the present value of future earnings is higher. 

However, the reverse is true if the 10-Year yield is higher, with stocks looking less attractive on a risk-reward basis compared to the relatively lower-risk nature of the 10-Year. 

Monetary policy 

Although it’s not the only metric that the Fed watches to determine interest rates, the 10-Year Treasury yield is an important factor that goes into the central bank’s decision-making process. It can help the Fed more appropriately set short-term interest rates in order to meet its dual mandate of maximum employment and stable prices.  

A higher yield could incentivise the Fed to raise short-term rates to prevent the economy from overheating while a falling yield could help the central bank to lower rates to support growth (i.e. employment).   

Drives global investment decisions 

Given its size and perceived lower risk, the 10-Year Treasury also influences investment allocation decisions globally. This can materially impact capital flows between countries and regions. That’s one reason why investors may observe foreign nations increasing their Treasury holdings when higher yields make them appear relatively more attractive than domestic alternatives. 

Factors affecting the 10-Year Treasury yield  

There are many factors that impact the direction of the 10-Year Treasury yield. One is inflation. When inflation expectations rise, the purchasing power of future bond payments diminishes, prompting investors to seek higher yields in compensation. On the other hand, when inflation expectations decline, yields tend to fall as well. 

Although the US Fed directly sets short-term interest rates, its broader monetary policy stance is one way the Fed influences longer-term yields. Actions like quantitative easing (QE) or quantitative tightening (QT) also shape 10-Year Treasury demand, thereby affecting yields. 

Uncertainty in geopolitics can also impact yields. During periods of geopolitical tension or financial market instability, such as trade wars or civil unrest, investors often move funds into safer assets like Treasuries. This so-called “flight to safety” tends to increase demand and reduce yields. 

Then there’s the differences in interest rates across major economies. This can influence the relative appeal of US Treasuries. For instance, when major central banks like the European Central Bank (ECB) or Bank of Japan (BOJ) maintain ultra-low rates, US Treasuries become more attractive to global investors. The upshot is higher demand and lower yields. 

Finally, the 10-Year Treasury can also influence currency markets. A stronger US dollar may enhance the appeal of Treasuries to foreign investors, potentially boosting demand and putting downward pressure on yields. Conversely, a weakening dollar may deter foreign investment, which may place upward pressure on yields. 

Are 10-Year Treasuries a Popular Benchmark investment?  

From an institutional point of view, the 10-Year yield often serves as a benchmark and it is commonly included in portfolios as it can help reduce the risk of underperformance relative to peers (such as the MSCI World Index returns).  

For retail investors, 10-Year Treasuries may form part of a broader asset allocation strategy, depending on individual time horizons and risk tolerance. They can also be used as instruments for short term trading, given the market’s depth and liquidity.  

Current outlook on 10-Year Treasury yield 

The 10-year US Treasury yield has been in a consolidation phase since peaking at 4.92% on 16 October 2023, fluctuating within a relatively stable range between 3.72% and 4.70%.  

Coinciding with this, the S&P 500 Index actually bottomed out and began a strong rally throughout late 2023 and into 2024, reflecting a broader “risk-on” sentiment in equities. 

However, the relationship between the 10-year yield and the S&P 500 Index isn’t always linear. For instance, during the 2020-2022 COVID-19 period, both moved in tandem due to near-zero interest rates and the Fed’s QT measures, which dampened interest in Treasuries.  

As the Fed began hike rates in 2022, the 10-Year yield surged, the 2s10s curve inverted, and capital shifted from equities into bonds. 

More recently, the S&P 500 Index’s sharp correction was preceded by a rise in yields to 4.6% in December 2024, driven by expectations that the Fed would maintain its policy stance amid a strong labour market and persistent inflation. 

Currently, yields have declined due to heightened demand for 10-year Treasuries. This is a reflection of market caution amid rising geopolitical risks, primarily President Trump’s proposed across-the-board tariffs and potential trade tensions with China. 

Looking ahead, some analysts suggest that yields could rise if China were to reduce its US Treasury holdings as part of a broader fiscal strategy, though this remains uncertain and dependent on evolving economic conditions. 

Should this happen—and if the S&P 500 Index continues to weaken—capital may rotate into other potential assets and markets.  

Conclusion 

Overall, the US 10-Year Treasury is a safe haven asset that has phenomenal liquidity and can be used as part of a long-term strategy or to trade on short-term movements. Investors should remember that the 10-Year Treasury is used primarily as a benchmark that helps value and price other assets. 

Amid recent geopolitical developments, including proposed tariffs, the 10-Year yield has move more than expected. These movements may result in short-term price fluctuations that experienced traders monitor closely, depending on their strategy and risk appetite.  

Open an account with Vantage to access US Treasuries CFDs, and much more. 

References