Why the US 10-Year Treasury Matters and How It Affects the Stock Market

Why does the US 10-year Treasury yield matter, and how does it affect the stock market? People often say that when the 10-year Treasury yield rises, stocks are more likely to fall. But why is that? In this post, I'll explain it as simply as possible.

The Concept of Bonds

First, let's take a quick look at bonds. A bond is a certificate of promise that proves a debt relationship between the issuer and the investor. Bonds are issued by governments, public institutions, banks, companies and others, which raise funds by issuing bonds when they need money.

Meanwhile, the bond yield refers to the return you can earn by holding a bond. Bond yields and bond prices are negatively correlated. In other words, when bond prices are low, bond yields rise, and when bond prices rise, bond yields fall.

Bond yields are used as an important indicator for forecasting the economy. In particular, the yield on the US 10-year Treasury is one of the most widely used indicators for predicting future economic conditions.

The United States has the largest economy in the world and is one of the most stable countries, with a low chance of collapse. That's why US Treasuries in particular are considered one of the safest assets in the world and play an important role in global financial markets.

Why the 10-Year Treasury Yield Matters

Treasuries come in a variety of maturities, such as 1, 2, 10 and 30 years. Among them, the maturity investors pay the most attention to is the 10-year. The 10-year Treasury reflects the economy's growth rate and is regarded as the key Treasury that serves as a global benchmark. Why is that?

1. An indicator of economic health: The US 10-year Treasury yield reflects how optimistic or pessimistic investors are about the future of the US economy. A high bond yield can mean that investors expect economic growth, while a low yield can mean there is a lot of concern or uncertainty about the economy.
2. A benchmark for interest rates: The US 10-year Treasury yield influences the interest rates of many other financial products. For example, 30-year home mortgage rates are usually closely tied to the 10-year Treasury yield.
3. An indicator for investment strategy: Investors often compare the 10-year Treasury yield with the yields of other Treasuries, such as the 2-year Treasury, to decide on their investment strategy. The difference between these two yields shows the shape of the "yield curve." When the yield curve flattens or inverts, it can be taken as a signal that an economic slowdown or recession is expected.
4. Risk-free return: The US 10-year Treasury is considered a risk-free, safe asset. As a result, bond investing can become more or less attractive compared with other investment opportunities.
5. An indicator of central bank policy: The US 10-year Treasury yield can show how the market is reacting to the monetary policy of central banks such as the US Federal Reserve (Fed). For example, when the Fed is expected to raise interest rates, the 10-year Treasury yield also tends to rise.
6. An indicator of international capital flows: Depending on the relative strength or weakness of the US economy and changes in the global investment environment, international capital can flow into or out of US Treasuries. These movements are reflected in the 10-year Treasury yield and can tell you which direction global money is flowing.

Why the Stock Market Wobbles When the 10-Year Treasury Yield Rises

Movements in the US 10-year Treasury yield affect the stock market in a number of ways.

• When yields rise, more investors want to put their money into bonds, which are safe assets, and demand for stocks decreases. As a result, sell orders increase in the stock market and stock prices may fall.
• Changes in Treasury yields also affect other interest rates. When rates rise, the borrowing burden on those who borrow money increases, and businesses and households have less room to invest. This can put the brakes on economic recovery and cause instability in financial markets.

As we've seen above, if the US 10-year Treasury yield spikes, money generally tends to flow out of the stock market. In other words, as the financial burden on businesses and households grows, investing in US Treasuries, which are both safe and high-yielding, becomes a better option than investing in stocks, Bitcoin or other risk assets.

Let's sum it up once more. When US Treasury yields rise, the value of the US dollar goes up, and investors' money may move from the stock market to the US bond market.

As a result, rather than putting money into Big Tech companies known as growth stocks, investors buy US Treasuries that can generate returns safely, and Big Tech stock prices may fall. This is one of the most typical effects the 10-year Treasury has on the stock market.

Wrapping Up

Let's summarize. Government bonds are bonds issued by a country, and they are a way to raise funds by selling bonds to investors. Among them, the US 10-year Treasury reflects economic trends and plays an important role.

In general, when the 10-year Treasury yield rises, the stock market tends to fall, because investors can earn higher returns while taking on less risk.

That wraps up our look at the relationship between the US 10-year Treasury yield and the stock market. Thank you.