10-Year Treasury Yield vs. 10-Year Bond Yield

Key Takeaways

• Treasury Notes were recently yielding 4.2%, up from 1.5% earlier this year.
• Corporate bonds now yield 5.1%, up from just under 3% at the beginning of the year.
• Investors need to take into account the Federal Reserve and if interest rates will continue to rise before deciding to invest in either of these securities.

Right now, the 10-year Treasury yield and 10-year bond yield are very attractive to investors. The main reason is that yields have been low for many years. But this doesn’t mean now is necessarily the time to invest in intermediate-term debt instruments. Here is what you need to know about these investments and their outlook to make a smart financial decision.

What is a Treasury Note?

A Treasury Note is debt issued by the United State government. The government issues debt securities to help finance its spending. Depending on the time until maturity, these investments have different names.

Securities that mature in one year or less are called Treasury Bills. Securities that mature between two and ten years are called Treasury Notes. Securities with a maturity greater than ten years are called Treasury Bonds.

Treasury Notes pay interest semi-annually until maturity. Since the government backs them, they are seen as risk-free investments. This is because of the general belief that the US government will not fail, so debt holders are practically guaranteed to get their money back.

The interest rate paid is determined by the debt security’s maturity, with longer-term bonds offering a higher interest rate than shorter-term notes. However, this is not always the case.

What is a Corporate Bond?

A corporate bond is also a debt security. The major difference is that corporations issue these to help fund growth. They are typically issued in terms ranging from one year up to 30 years. Most pay interest semi-annually, and some corporate bonds pay interest quarterly or monthly.

The interest rate an investor earns on a corporate bond is tied to the duration of time until the bond matures as well as the company’s credit rating. Typically, the longer the time until maturity, the higher the interest rate.

The higher the credit score, the less risk of default and the lower the interest rate tied to the loan. The lower the credit score, the higher the risk of default, and the higher the interest rate. The highest rating for corporate bonds is AAA. These, along with any bond with a rating above BBB for S&P or Baa for Moody’s, are called investment-grade bonds.

Any bond rated BB+ or lower by Standard & Poor’s or Ba1 by Moody’s is considered a junk bond. This rating doesn’t mean the company is at risk of going out of business any time soon. Rather, its financials are not ideal. Many investors purchase junk bonds without issue. It is important to note that some mutual funds and other investment accounts cannot invest in junk bonds, only investment-grade bonds.

Current 10-Year Treasury note rate

The yield rate for the 10-year Treasury Note hit 4.266% on October 24, 2022, after starting the year around 1.51%. The rate peaked earlier in June at 3.48%, when the assumption was that inflation was under control and investors began buying Treasuries, pushing yields down. The yield fell to a low of 2.60% by the end of July but it’s been rising ever since.

Historically, yields on the 10-year Treasury have been falling since the early 1980s, from a high of nearly 16% to a low of 7% in the latter half of the decade. In the 1990s, yields started around 7% but fell to 5% by the decade’s end. From 2000 to 2010, yields were stable at about 4%, until falling to 2-3% from 2011 through 2020. Yields dropped below 1% during the pandemic in 2020 and 2021.

Current 10-Year corporate bond rate

The rate for a 10-year investment grade corporate bond was 5.18% as of September 2022 after starting the year below 3%. The increase in these bonds is similar to the rise in Treasury Notes. There was an increase in yields through June, then a pullback until September, when yields spiked again.

Since 2010, these are the highest yields for corporate bonds, as rates hovered between 3-4% from 2010 through 2018 before sinking. By mid-2020, rates were below 2%, Between 2000 and 2010, rates ranged from 4.5% to 8% and over 8% during the Great Recession.

10-Year Treasury vs. 10-Year Corporate Bond

Corporate bonds will typically yield more than Treasuries since there is greater risk of loss when buying corporate bonds. As a result of this risk, the bonds must offer a more attractive yield. The question for investors is, is the payoff from earning roughly 1% more worth it? For some investors, particularly those interested in income, the answer is yes.

But one also has to consider the potential for losses should interest rates continue to climb. In six months, if 10-year corporate bonds are yielding 6% or more, investors holding the bonds with a 5% yield will have to sell for a loss if they want to move their money over to higher yielding bonds. Of course, the same is true if one invests in 10-year Treasuries as well. However, Treasuries might not need to be sold for as much of a loss, given their risk free nature.

Where are yields expected to go from here

There are mixed opinions on where the yields for bonds will go in the coming months. Over the immediate short-term, yields should continue to rise slowly as the impacts of recent Federal Reserve rate hikes work their way through the markets.

Over the longer term, however, is where the uncertainty lies. Some experts think the Fed will raise interest rates in November and then take a hard look at the economy in the U.S. and the rest of the world before deciding to increase rates further or pause. Others believe the Fed will stick with its plan of raising interest rates until inflation returns to the target goal of 2-3% annually. In this case, yields would continue to climb, possibly hitting 5% for 10-year Treasuries.

Bottom Line

With inflation showing few signs of easing, investors in 10-year debt instruments are in a difficult position. Yields are attractive compared to recent years when investors were lucky to earn 2%. But while a 4% yield looks good, one has to remember that inflation is still at 8%, meaning you are losing purchasing power, at least over the short term. A better option for some investors might be to invest in shorter-term bonds until there is more clarity on the direction of the Federal Reserve.

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