How a 10-Year Treasury Note Works: A Simple Breakdown

How a 10-Year Treasury Note Works: A Simple Breakdown

A 10-year Treasury note is essentially debt issued by the U.S. government. It's considered a safe haven asset because it's backed by the full faith and credit of the U.S. government—basically, it’s risk-free. Here's how it works:

The government announces how much debt it needs to issue, and then it’s auctioned off. The auction sets the coupon (interest rate), which is why it’s called a coupon—because, back in the day, you’d literally clip coupons to collect the interest.

For example, if you buy a $1,000 Treasury note with a 5% yield, that means you’ll receive $50 a year (5% of $1,000). At the end of 10 years, you'll get your $1,000 back—unless the government defaults, which they never have (they're like the Lannisters: they always pay their debts).

Now, here’s where things get a bit tricky: The price and yield of these notes have an inverse relationship.

When demand is high, the price of the Treasury note goes up, but the yield goes down. For example, if the price goes up to $1,100, you're still getting that $50 interest, but now it’s 4.5% yield (because $50 on $1,100 is less than $50 on $1,000).

When demand is low, the price goes down, and the yield goes up. So, if the price drops to $900, you’re still collecting $50, but now the yield is 5.5% (because $50 on $900 is a higher percentage than $50 on $1,000).

This whole process is critical for things like mortgage rates and the cost of government debt. The Federal Reserve can buy these Treasury notes as part of quantitative easing, which lowers the yield and can stimulate the economy by making borrowing cheaper.

But if foreign entities sell off large amounts of Treasury notes, it can have the opposite effect—increasing yields and raising costs for everyone, including consumers and the government.

It’s all interconnected. And believe it or not, the bond market has even been used as a form of protest, where large holders of Treasuries sell off their holdings to send a message to the government. So, next time you hear about the bond market, just remember, it’s more than just numbers—it’s a massive player in the economy.