What the 10-Year Treasury Says About the Economy

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There’s no lack of economic indicators for investors to look at when it comes to gauging the current health of the economy. From unemployment figures to GDP estimates, investors have access to virtually any type of data they could want. But one of the most under-represented indicators is the 10-year treasury yield.

The yield on the 10-year treasury is used as the basis for interest rates in the US. Investors can use it to track historical trends and easily determine if rates are rising or falling and how quickly or slowly it’s happening. More importantly, though, the yield can be used as a proxy for overall interest rates, mortgage rates, and other important types of interest rates.

The 10-year treasury as a fortune teller

The 10-year treasury is noted as being the standard for analyzing bonds and bond yields. There is an inverse relationship between yields and bond prices; when yields rise, bond prices fall and vice versa. When investor confidence in the markets is high, bond prices fall and yields rise along with stock values. However, low confidence in the markets means more investors chasing safe haven assets causing bond prices to rise, and yields to fall.

The market usually behaves in a pattern. These observable inter-market relationships can help investors anticipate where the market is going and build portfolio strategies to take advantage of it. For example, when currencies rise, a chain of events begins starting with a fall in commodities prices. Bond prices will then rise while yields fall and finally, stocks will rise thereby completing the cycle.

Another important aspect of the 10-year treasury yield is how it can help investors track changes along the yield curve. Typically, debt obligations with a long maturity pay a higher yield because their investment is tied up for a longer period of time. Longer maturity bonds are also more volatile and sensitive to changes in rates. However, the yield curve can become inverted where shorter-term yields are higher than longer-term ones. This happens most often when yields are expected to decline over time and is considered a precursor to an economic recession.

Finally, the 10-year yield is helpful when compared to inflation which helps investors track real yields and determine whether rates are keeping up adequately with inflation or if deflation is becoming a concern.

Final considerations

Investors should note that market changes don’t always happen on a predictable time-table. While asset classes do interact with one another, changes can take place quickly or slowly depending on a number of different factors. Other considerations like inflation also need to be taken into account to give context┬áto the numbers. A macroscopic view of yields will help investors make smarter decisions in their portfolios.