The vanilla investment: The 10-year treasury rate

Investments are never good or bad ideas in a vacuum. They are only ever more or less risky, and offer the possibility of more or less return, than another investment. If the options are sticking your money in a mattress or putting it in a savings account, the savings account offers the better return and is the better investment. If you add a diversified investment portfolio to the mix of options, putting your money in a savings account exclusively looks worse in comparison.

 

That’s a big part of the importance of the 10-year treasury bond rate. This is the rate of interest the federal government pays on loans with a life of 10 years, called 10-year bonds. 10-year treasury bonds are the default investment against which every other investment is compared. They’re among the safest investments people can make, since they’re relatively short-term loans guaranteed by the full faith and credit of the United States Government. In the event the government can’t pay back that loan, investors will have much larger problems, like the absence of basic government services. The return on the 10-year treasury bond is the closest thing to a sure thing in investing.

 

The 10-year treasury rate is set by auction. Investors bid an interest rate they’d accept for a 10-year loan, and the lowest bidder wins. That sets the price for other investors.

 

Since the rate is determined by investors, this rate is a pretty good indicator of the confidence investors have in economic growth. When the rate is low, it means investors think they can get reasonable rates of return in other sectors. When the rate is high, it means investors think other sectors of the economy are too risky, so they are aggressively buying safe investments.

 

Beyond a thermometer on the state of the economy, the 10-year treasury rate also determines, in part, the costs consumers pay for a variety of goods. 30-year fixed rate mortgages, for instance, are also very safe investments with long terms. When the price of the 10-year treasury bond drops, the price of the 30-year fixed rate mortgage tends to do so as well. The same is true for other safe, investor grade bonds.

 

Of course, these other factors have spillover effects as well. Lower mortgage rates tend to produce upswings in real estate values. This means REITs and other real estate holding trusts tend to perform better with a lower 10-year treasury rate. Many, many other aspects of the economy perform better or worse in response to the 10-year treasury rate, making it one of the most important economic indicators for investors and policymakers alike.

One thought on “The vanilla investment: The 10-year treasury rate

  • July 21, 2016 at 3:09 am
    Permalink

    people will keep fleeting to treasuries when people feel fear

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *


0
%
Please wait...

Subscribe to our weekend edition newsletter and receive a free special edition copy of my upcoming book.

Sign up for Stewnomics Weekend Edition. Get all of your weeks news in a single email! Link will be emailed to redeem copy of book upon release.