Treasury bonds and notes are one of the most widely tracked debt instruments in the markets by investors, regardless of their exposure to debt or equity markets. Among the different types of Treasuries that are available, the 10-year T-Note is uniquely positioned in terms of maturity or the duration of the bond thus making it one of the most widely tracked debt instruments.
The 10-year Treasury note is a loan to the U.S. government and comes with a 10-year term or a decade. The 10-year Treasury note (or T-note) offers a yield or the rate of return you get for investing or loaning money to the government. The yield or the rate of return makes for an important benchmark in the Treasury markets and it guides the other interest rates.
The yield on the 10-year Treasury note is often monitored by the U.S. Federal Reserve and is one of the factors considered when the Fed decides to change interest rates. Unlike the short term Fed funds rate which is set by the central bank, the T-notes are auctioned, leaving the yields susceptible to the free market forces. The yield on the 10-year Treasury note dictates the level of confidence bond investors have in the U.S economy. As with all Treasuries, the 10-year Treasury note is considered to be “riskless,” as they are backed by the full faith and credit of the U.S. government.
The 10-year Treasury notes can be purchased directly from the TreasuryDirect.com website with a minimum purchase of $100. The 10-year T-notes can also be purchased from the bank or a bonds broker dealer. The financial derivates of this 10-year T-Note is the T-note futures.
How are the 10-year Treasury notes priced?
A combination of various factors comes together in influencing the price on the 10-year T-Notes. These are:
Face value: Also known as the par or par value, it is the price the government agrees to pay the bond holder upon maturity
Dollar price: This is the amount of U.S. dollars that you pay for the bond relative to the face value
Interest rates: This is the amount of interest the government agrees to pay the T-Note holder for the duration of the bond’s maturity
Yield: Yield is the combination of the dollar price and the interest rate paid for the duration of the bond’s maturity. It is expressed as a percentage.
The 10-year treasury notes are sold at a bond auction through the open markets. The bonds are sold to the highest bidder. The price is also influenced by the demand for the T-notes. When there is weak demand, the T-notes are said to be selling at a “discount to face value.” What this means for the buyer of the 10-year T-note is that they get a higher interest rate on the debt instrument. Conversely, when there is high demand, the T-notes are said to be selling at a “premium to face value.” In such circumstances, the buyer gets a lower rate of interest.
The 10-year treasury pays a fixed interest rate once every six months and the full face value is paid upon maturity. For example, if you purchased the 10-year T-note at auction and held to maturity, you get back the face value of the bond plus the interest that is accrued over the 10-year period.
Once a buyer purchases the 10-year T-Note they can either hold it to maturity or sell in the secondary markets. When the 10-year T-note is sold, you do only get the current dollar price and not the face value which can lead to a loss on the investment. The 10-year T-notes can be traded in the secondary markets and can trade either at a premium, par or discount.
There are many reasons why a bond holder would want to sell or buy bonds in the markets, something which is discussed in the remainder of this article.
The 10-year Treasury Rate
The 10-year treasury rate is the yield to maturity of the most recently auctioned 10-year Treasury bond. This is not to be mistaken for the fixed interest rate that is paid. The Yield to maturity or YTM is determined by the market price of the bond and the coupon’s interest rate. The 10-year treasury rate is one of the most widely reported numbers in the financial media as it impacts a variety of lending rates such as mortgage rates in the U.S.
The 10-year treasury rate chart below is plotted since 1962 with the shaded areas depicting the recession years.
The U.S. 10-year Treasury Rate since 1962 (Source)
In general, rising yields signify optimism in the economy. The above chart shows that yields increased from 4% in the pre-1970’s and rose steadily into the 1980’s before falling in a steady trend ever since. When you look at the bond prices, the chart would be inversely correlated, meaning that bond prices would have fallen into the 1980’s before rising since then. You might have come across terms such as “the great bond market rally” which is nothing but the above chart. So while yields have fallen since 1980’s, bond prices have been rising steadily since then.
What are the 10-year Treasury note Futures?
The 10-year T-Note futures are the derivates instruments of the 10-year Treasury note bonds and track the underlying asset’s prices. Traders can purchase the 10-year T-note futures either to hedge their risks against the underlying market or to re-balance their portfolio.
When trading the futures markets, the 10-year T-note futures can be held to maturity for delivery of the underlying asset or in most cases settled for cash, making it a prime instrument for bond traders to speculate on the interest rates as well as the economy.
||10-year Treasury Note
||TY or ZN (Used interchangeably based on the broker)
||One Treasury Note with a face value at maturity of $100,000
||U.S. Treasury notes that have a remaining term-to-maturity of at least six and half years but no more than 10 years, from the first day of the delivery month
||Points ($1000) and halves of 1/32 of a point
||0.015625. [One-half of one thirty-second (1/32) of one point ($15.625)]
||Sun – Fri (1700 – 1600)
||(Mar) H, (Jun) M, (Sep) U, (Dec) Z
An important distinction with the 10-year Treasury note futures prices is that the U.S. treasury notes must have a minimum remaining term to maturity of six and half years.
The next chart below shows a typical 10-year Treasury note futures chart priced in decimals. You can also find various other pricings such as in fractions. No matter how the T-note price chart is presented, they indicate the same values/data.
10 Year Treasury Note Futures price chart in decimals
Factors that influence the 10-year T-note futures
When trading the 10-year Treasury notes, futures traders need to keep an eye on a number of different factors that can influence the prices. Due to the term of the T-Note it is one of the most widely watch and traded debt instrument. So while this signifies ample liquidity, both in the futures and in the cash market’s secondary market it is also vulnerable to trader or investor psychology. Some of the factors that influence the 10-year T-note futures are outlined below.
Safe haven demand: Due to the timing of the maturity of the 10-year T-Notes, and the fact that the bonds are backed by the full faith and credit of the U.S. government, the 10-year Treasury note is often sought after as a safe haven instrument. Also known as the flight to safety, demand for the 10-year Treasury note is higher when there are geo-political tensions outside of the U.S.
The chart below gives one such example where the price of the 10-Year T-Note future shoots up within a 24 hour period driven by uncertainty of the Brexit referendum results.
Demand for the 10-year T-note future rises sharply within a 24-hour period on Brexit uncertainty
Vote of confidence on the economy: Investors often use the 10-year T-note yields as a vote of confidence on the U.S. economy. In this instance, the principle being that a rising economy will see investors shift funds to risk assets such as equities which tend to rise during a strong economy. This in turn leads to weaker demand on the 10-year T-note futures thus sending yields higher.
The chart below shows how for the most of 2016, bond investors were wary of the U.S. economy thus pushing yields lower as demand for the T-note increased. After a series of events (such as Brexit, etc.) the yields slowly started to rise again and the yields shot up after the November presidential elections in the U.S. where the president-elect Donald Trump promised fiscal spending. At the same time, the U.S. economy also surged full steam ahead. The rise in the bond yields was the green light needed by the Fed which managed to comfortably hike rates at the December 2016 meeting for the second time.
Yields on the 10-year T-Note (which are inversely related to price) show low level of confidence for the most part of 2016
The Treasury Yield Curve: The Yield curve is one of the most important aspects when dealing with bond and bond futures. A lot can be understood from the yield curve including the business cycle. The yield curve is a comparison of the yields on all the Treasuries, ranging from the one-month T-Bill to the 30-year T-Bond. The 10-year T-note sits in the middle. In a good performing economy, the yields on the short end of the curve are priced lower, while the yields on the far end of the curve are priced higher. When bond investors believe that the economy is starting to slow or at the end of a business cycle, the yield curve can be inverted. In this scenario, yields on the short term maturities are higher compared to the longer maturing bonds.
Example of a (rising) yield curve where yields on the longer maturing bonds are higher
The above factors are one of the most important aspects that can shape the sentiment and market prices on the T-Note futures on a day to day basis. Those who wish to trade the T-Note futures, it is absolutely essential to bear in mind a lot more things that can influence the prices including oversees geo-political events and developing macroeconomic fundamentals especially from Europe and Japan.