We research all brands listed and may earn a fee from our partners. Research and financial considerations may influence how brands are displayed. Not all brands are included. Learn more.

Originally Published: Mar 12, 2021
Originally Published: Mar 12, 2021 Last Updated: Apr 23, 2021 8 min read

Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.

A pie weight is holding down a sad face balloon.
Kiersten Essenpreis for Money

When market watchers want to gauge investors’ confidence in economic growth, they look to a key benchmark: the yield on the 10-year U.S. Treasury note.

A rising yield indicates there’s less demand for Treasury bonds, while a falling yield indicates investors are on the hunt for the bonds — and we’ll break down what that means.

Here’s what you need to know about the 10-year U.S. Treasury yield, and how it plays into your portfolio.

What is the 10-year Treasury?

When you buy a bond issued by the U.S. government, you’re essentially giving Uncle Sam a loan. These Treasury securities include notes — often called T-notes — bonds and Treasury Inflation-Protected Securities (TIPS). Gone are the days of paper bonds; investors can now buy them directly through the Treasury’s website, or via a bank or broker.

T-notes are issued with two, three, five, seven and 10-year maturities in increments of $100. Bondholders earn interest every six months and when the T-note matures, they get back the bond’s face value — that is, the amount they paid for the bond when it was first issued.

Although these notes have a certain date at which they mature, investors don’t need to hold them to that date. You can sell them whenever you like to another buyer in what’s called the secondary market, which is how investment banks sell them to investors. In that scenario, you receive the current market value of the bond when you sell, instead of the face value.

You don’t have to pay state and local income taxes on interest earned from these notes, but you do have to pay federal income tax. T-notes are also backed by the U.S. government, so they’re considered among the safest investments, as the government isn’t likely to default on its obligations

What Is the 10-year Yield?

Enter yields. A T-note’s yield is its annual income divided by its current price. When demand is high, bidders pay more, resulting in a lower yield and ultimately, a lower return on your investment. The yield on the 10-year Treasury is watched closely, as it’s used to measure how confident investors are in the economy. When investors are scared, they flock to the perceived safety of Treasury notes and bonds, driving the bonds’ prices up and yields down; the reverse happens during an economic recovery.

What is going on with the 10-year Treasury yield?

The 10-year Treasury yield climbed from mid-2020 to early 2021. Although the yield has recently declined, it’s still much higher than where it was at the beginning of the year.

The climb indicates Wall Street’s optimism about an economic recovery as the COVID-19 vaccine continues to be distributed, says Jeffrey Hibbeler, senior portfolio manager at Exencial Wealth Advisors based in Huntersville, North Carolina. Back when yields were lower, investors turned to other investment options like stocks to seek higher returns. More recently, the rise in yield levels is likely driving volatility in stock prices, he adds.

What is the 10-year Treasury telling us about inflation?

A bullish sentiment for the economy comes with inflation concerns.

“The bond market typically is known as the smart market,” says Matthew McKay, investment analyst at Briaud Financial Advisors based in College Station, Texas. For example, in the lead up to the Great Recession, the bond market was flashing red before stocks registered any sign of trouble. When Wall Street looks to the bond market to understand what is going on in the economy, a steepening of the long end of the yield curve — yields that are 10 years or more — indicates that inflation may rise.

Keep in mind that year-over-year inflation will rise either way, McKay adds. The beginning of 2020 saw such low economic numbers, we’re bound to see inflation rise as the economy recovers and prices pick up.

The question then, especially for long-term investors, is whether inflation is lasting or not, and whether it will rise at a persistent, higher-than-average level. If it’s not lasting, we might see rates declining in the second half of the year.

Higher yields have fixed-income fund managers looking to riskier securities, like to junk bonds and even stocks, the Wall Street Journal reported. That’s because high yields means lower prices for the bonds you own. Not every investor is in the same boat, though — retirees who depend on bonds for income, for example, want to see higher yields.

Average, well-diversified investors aren’t reliant on long-term bonds — they also own other asset classes, which would outperform in the same inflationary environment that’s weighing on bonds.

How can you protect your portfolio from inflation?

Another type of Treasury bond, TIPS, are one way to protect your portfolio against inflation. The amount the government repays the bondholder goes up and down with the consumer price index, so TIPS always maintain their “real” value, which takes inflation into account. The bonds’ interest payments, paid twice a year, are adjusted for inflation as well. In short: they’re designed to hedge against inflation, so they will often outperform other Treasury bonds during periods of high inflation. Money previously reported that exposure to this type of security could be as low as 1-2% if you're a high-risk investor, or as high as 10% or more if you’re in retirement.

Commodities — natural resources like copper, crops and oil whose prices have been jumping recently — are another way to hedge against inflation. Historically, commodity prices have a high correlation with inflation, and investing in commodities can allow investors to profit off of those rising prices. Financial advisors tend to recommend choosing a diversified commodities ETF or mutual fund instead of picking commodities specifically. Having 5%-10% overall portfolio exposure to commodities could make sense, Money previously reported, with that number increasing for someone further from retirement and decreasing for someone in or near retirement.

Stocks can also be good hedges for moderate inflation, as typically earnings will increase as overall inflation increases, Hibbeler says. The recommended stock-bond ratio varies by age and risk tolerance, but some advisors say you can have up to 90% of your portfolio in stocks if you’re young and just starting your career, lowering that number the closer you get to retirement.

This story has been updated to reflect recent market moves.

More from Money:

Retirement Income: Where to Find the Best Yields for March 2021

Prepare Your Portfolio: Rising Copper and Oil Prices Indicate a Commodities 'Supercycle' Is Coming

Why the Improving Economy Is Actually Hurting the Stock Market