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Mar 10, 2020

Why the 10-Year Treasury Bond Yield Matters

By Team Stash

Investors are seeking lower risk investments during the coronavirus outbreak.

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Surgical masks and Treasury bonds are both in big demand.

The yield on 10-year Treasury bonds fell to a record low of 0.318% on Monday, March 9, 2020, as the outbreak of the coronavirus known as Covid-19 continues to affect global markets. This is the first time that the entire U.S. yield curve has fallen below 1%. The 10-year bond is typically a safe haven for investors, who are reportedly buying up bonds as stocks seem less certain. The Dow Jones Industrial Average and the S&P 500 both fell by more than 7% on Monday, causing a halt to trading for 15 minutes.

How does the bond market work?

The 10-year Treasury bond is a type of bond issued by the U.S.federal government that matures over the course of ten years. (It is one of the best-known U.S. bonds, and it’s considered a benchmark for interest rates, as well as a safe haven for investors.) When investors purchase Treasury bonds, they lend money to the government, with the idea that the government will pay them back with interest over a certain time period. 

Bonds have three key components—a maturity date, a price, and an interest rate. The interest rate, sometimes referred to as the coupon, stays the same, while the price of a bond typically fluctuates. Together the price and the interest rate combine to give you the yield of the bond. While the interest rate of the bond is fixed, the yield will fluctuate, based on market conditions. Generally speaking, the further away a bond’s maturity is, the higher its interest rate is likely to be, to compensate the investor for the risk of longer repayment.

Bond prices and interest rates have an inverse relationship. Prices of bonds increase when demand increases, demonstrating a basic market principle of supply and demand.  As the price increases, however, the interest rate falls. By contrast, when interest rates rise, the price of bonds falls.

When new bonds are issued with higher interest rates, the price of your bond will decrease. If new bonds are issued with lower interest rates than when your bond was issued, the price of your bond will increase. (While the price of your bond might fluctuate, the par value of the bond, or the amount of money you’ll receive once the bond is mature, will stay the same.)  

What’s going on with the 10-year Treasury now?

Interest rates have fluctuated over the years. Following inflation in the 1970s, the 10-year Treasury hit nearly 16% in the early 1980s. Since then, interest rates have been on a downward trend. During the 2008 financial crisis, the Federal Reserve took drastic measures and cut interest rates dramatically. Since then, the 10-year Treasury has offered a yield between 1.5 and 4%. The rate for 10-year bonds was reportedly around 1.5% in mid-February, but it has continued dropping as the coronavirus has spread globally, affecting markets. The virus has been reported in 115 countries, and it has infected more than 116,000 people, killing more than 4,000. 

In the United States, where more than 700 cases of the virus have been reported and more than 25 people have died, markets have tumbled since the end of February. In response to the volatility, the Federal Reserve (the Fed) made the biggest cut in its benchmark rate since the financial crisis in 2008, reducing the rate by 0.5 percentage points on March 3, 2020. The move to cut the rate was intended to encourage growth despite the panic. 

However, the yield on 10-Year bonds fell below 1% for the first time ever as investors sought to move their money to more long-term, low-risk investments, such as 10-year bonds. The 10-year bond is typically thought of as a secure investment that provides reliable returns.

As bond prices go up, yield falls. This movement could mean that investors are expecting a long-term impact from the coronavirus. The yield on 30-year Treasury bonds also fell below 1% for the first time ever.  The 30-year Treasury bond is another type of government bond with a longer maturity rate. 

A war over oil prices is also affecting the yield on bonds. On Friday, March 6, 2020, the Organization of Petroleum Exporting Countries (OPEC), a group of 14 of the biggest oil producers met with Russia, also a big oil exporter, to discuss oil production in the time of coronavirus. After the group failed to reach an agreement, Saudi Arabia announced that it would not decrease production of oil and that it would reduce the price. 

As a result, oil prices experienced the biggest drop since the Gulf War in 1991. Falling oil prices have caused further turmoil in bond yields and the markets.

Investing during times of volatility

During times of volatility, it is important to remember to diversify. A diversified portfolio is one that includes a variety of investments that are not all subject to the same market risks, including stocks, bonds, and cash, as well as mutual funds and exchange-traded funds (ETFs)

Diversification is an important part of the Stash Way which also includes investing for the long-term and investing small amounts regularly. The Stash Way can help you navigate uncertain market conditions, and headline risks such as the conditions caused by the coronavirus outbreak.

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