What is the 10-year Treasury yield?
The US Treasury borrows by selling securities: bills of a year or less, notes of 2, 3, 5, 7 or 10 years, and bonds of 20 and 30 years. A Treasury note pays a fixed rate of interest, the coupon, every six months until it matures, then repays its face value. Once issued, it trades in the market every day at prices that move with supply and demand.
The yield is the return a buyer earns at today’s market price. The Federal Reserve sets a short-term policy rate, but it does not set the 10-year yield directly: that comes from trading, and reflects expected short-term rates over the next decade, expected inflation and an extra return investors want for lending for longer, the term premium. The Treasury publishes daily yields for each maturity, and charting platforms list the 10-year under a symbol such as US10Y.
- Treasury yield
- The annual return an investor earns by buying a US Treasury security at its current market price and holding it to maturity. It rises when the price falls, and falls when the price rises.
- Basis point
- One hundredth of a percentage point, 0.01%. A move in a yield from 4.25% to 4.50% is a rise of 25 basis points.
- Term premium
- The extra yield investors demand for holding a long-term bond instead of rolling over short-term ones, as payment for the risk of tying up money for longer. It cannot be observed directly and is estimated with models.
Why do bond prices and yields move in opposite directions?
The coupon is fixed when the bond is issued, so the only thing that can adjust to new market rates is the price. Take a hypothetical bond that pays $1,040 in one year. Priced at $1,000, it yields 4%. If market yields rise to 5%, buyers will pay only $1,040 ÷ 1.05 = $990.48 for it, so its price falls. If yields fall to 3%, it is worth $1,040 ÷ 1.03 = $1,009.71.
Longer bonds move more, because their fixed payments run for longer. The drawing at the top of the page shows a hypothetical 10-year note with a $1,000 face value and a 4% coupon, paying $20 every six months. At a 4% market yield it is worth $1,000.00. If yields rise to 5%, the present value of its payments drops to $922.05, about 7.8% less; if they fall to 3%, it rises to $1,085.84. This sensitivity is called duration: the longer it is, the more a change in yields moves the price.
- Coupon
- The fixed interest a bond pays, set as a percentage of its face value when it is issued. A $1,000 note with a 4% coupon pays $40 a year, in two payments of $20 for US Treasuries.
- Duration
- A measure of how sensitive a bond’s price is to changes in yields, roughly the percentage price change for a one-point move in yield. Longer maturities and lower coupons mean higher duration.
Why do rising yields hurt growth stocks? The discount rate
A stock is worth the cash it will produce, discounted back to today, as the discounted cash flow lesson shows. Analysts often build the discount rate from the 10-year yield plus an extra return for the risk of owning stocks, the equity risk premium. When the yield rises, the discount rate rises with it, unless the premium falls at the same time.
In the drawing below, the 10-year yield rises from 4% to 5% and a 3-point premium stays the same, so the discount rate goes from 7% to 8%. Two hypothetical streams each pay $20 a year for five years. Near cash, in years 1 to 5, is worth $82.00 today at 7% and $79.85 at 8%, 2.6% less. Far cash, in years 11 to 15, is worth $41.69 at 7% and $36.99 at 8%, 11.3% less. The same one-point rise takes more than four times as much from the distant cash.
Growth companies have more of their value in profits expected years from now, so their prices tend to react more to yields than those of companies with steady profits today. The growth vs value stocks guide works through a related example. It is a tendency, not a law: if yields rise because the economy and earnings are strong, stocks can rise too.
- Equity risk premium
- The extra return investors require for owning stocks instead of safe government bonds. Added to a bond yield, it gives a discount rate for valuing stocks; it is estimated, not observed.
What is the yield curve, and what does an inversion mean?
The yield curve plots Treasury yields against their maturity, from three months to 30 years. Normally it slopes upward, because lenders want more to tie up money for longer. It is inverted when short-term yields are above long-term ones, often because markets expect the Federal Reserve to cut short-term rates later.
Traders often sum up the curve with the spread between the 10-year and 2-year yields. In the hypothetical drawing below, the normal curve runs from 2.8% at three months to 4.3% at 30 years, with a 10-year minus 2-year spread of 3.9 − 3.2 = +0.70 points, or +70 basis points. The inverted curve starts at 5.3% and dips to 4.4% at 10 years: 4.4 − 4.9 = −0.50 points, or −50 basis points.
Inversions came before several past US recessions, which is why they make headlines. They are not a timer: the gap between an inversion and any downturn has varied widely, an inversion has not always been followed by a recession, and stocks have sometimes risen for long stretches after one. Treat the curve as one piece of evidence about how markets see rates and growth, not as a forecast.
- Yield curve
- A line connecting the yields of bonds of the same issuer across maturities, usually US Treasuries from three months to 30 years. Its shape shows how yields differ with the length of the loan.
- Inverted yield curve
- A yield curve on which short-term yields are higher than long-term yields, the opposite of the usual upward slope. It often reflects expectations of lower short-term rates ahead.
- 2s10s spread
- The 10-year Treasury yield minus the 2-year yield, a common summary of the curve’s slope. A negative value means that part of the curve is inverted.
Do rising bond yields always mean falling stocks?
No. What matters is why yields move and how fast. Yields that rise because growth and earnings are improving can come with rising stocks. Yields that rise because inflation is running hot, or that jump very quickly, tend to hurt; inflation and the stock market shows how one CPI report can move them. And yields that fall because investors fear a recession often come with falling stocks.
A few practical habits:
- Watch the 10-year yield next to the index you trade; on TradingView you can overlay US10Y on SPY or QQQ.
- Ask why yields are moving: inflation, growth, Fed expectations or the supply of new Treasuries.
- Expect rate-sensitive groups such as utilities, real estate and long-duration growth stocks to react most; banks can respond differently because of their lending margins.
- Follow the scheduled catalysts on the economic calendar: CPI, jobs data, Fed meetings and Treasury auctions.
- Remember that relationships change: in 2022 stocks and bonds fell together, as intermarket analysis explains.