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Why Bond Yields Matter Even If You Don't Own Bonds

The 10-year Treasury yield sets the price of money around the world. Here is how it reaches mortgages, stocks and currencies.

By Global Terminal Staff · · 2 min read

A columned government building with an American flag
Photo: Joshua Woroniecki / Unsplash

Why it matters

  • Yields are the return investors demand to lend money to a government for a set period.
  • They set a floor for nearly every other interest rate, from mortgages to corporate loans.
  • When yields rise, stocks, currencies and property prices often adjust.

Explainer: background on how markets work.

A bond is a loan. When you buy a U.S. Treasury note, you lend money to the U.S. government, which pays you interest and returns your money at a set date. The yield is the annual return you earn if you buy the bond at today's price and hold it to the end.

Bond prices and yields move in opposite directions. When investors sell bonds, prices fall and yields rise. When they buy, prices rise and yields fall.

Why the 10-year matters most

The 10-year Treasury yield is the most watched interest rate in the world. Investors treat U.S. government debt as a low-risk benchmark, so other borrowers usually pay the Treasury rate plus an extra margin for their own risk.

Mortgages. U.S. 30-year mortgage rates tend to track the 10-year yield. When it rises, new home loans get more expensive.

Companies. Corporate bonds and loans are priced as a margin over government yields. Higher yields mean higher borrowing costs, which can slow investment and hiring.

Stocks. A higher risk-free return makes stocks less attractive by comparison, and it lowers the present value of companies' future profits. Fast-growing companies, whose profits lie further in the future, tend to be hit hardest.

Currencies. Money flows toward countries with higher yields. That is one reason the dollar has stayed strong against the yen: U.S. yields are far above Japan's.

What moves yields

Yields reflect what investors expect for inflation and for central bank policy over the life of the bond, plus an extra return for the risk of locking money up for years. When inflation stays high and central banks raise rates, as happened in September, yields usually rise. Our central bank roundup explains those decisions.

Where things stand

The 10-year yield touched 5.34% on Oct. 1, its highest since 2002, before closing near 5.24%. In September alone it rose about half a percentage point, from 4.79% to 5.29%, according to daily Treasury Department data. The chart on our markets page shows the month's path.

Sources