What The ’10-Year’ Means To Me

Lately, it seems as though, I’ve heard every single financial media buzzword on a daily, no, hourly basis. While each one has definite meaning and significance, the frequency in which they’re used is not only dizzying but aggravating as well. It’s borderline comical how many times I hear these terms. Mostly on TV, but I see them a lot in articles I read too. Here’s a few:

  • 200-day moving average (used to try and predict where stocks are headed by market technicians)
  • 50-day moving average (used to try and predict where stocks are headed by market technicians)
  • The ’10-year’ (referring to the current 10-year Treasury bond yield)
  • Cryptocurrencies/Blockchain (don’t even get me started)
  • Inflation (sometimes referred to as ‘real inflation’ or ‘core inflation,’ which excludes certain inflationary items)

Alright there’s a few and I’m starting to annoy myself with all this, so let’s move on.

What I want to highlight today is the 10-year Treasury yield (or simply the ’10-year’ that we ‘in the biz’ like to call it). It’s a significant number to look at for a handful of reasons. I’d like to point out a few of those said reasons because it’s something that I follow daily. First, if you own bonds or CDs, the rate you are earning is related to the 10-year yield. Second, if you own bonds (in whatever capacity. Individual bonds, bond mutual funds, or bond ETFs) the value of those bonds is going to fluctuate largely based on what the the 10-year is doing as well.

Let me back up for a second. The 10-year yield is largely impacted by two things:

  1. The Federal Reserve Open Market Committee (FOMC)
  2. Market forces (think supply and demand)

For the first time in quite a while, there are significant headwinds putting pressure on the bond markets. The FOMC has been increasing rates on a fairly regular basis for the past 18 months or so. At the same time, the Federal Reserve is ‘unwinding their balance sheet.’ That’s a fancy term which means the Fed is selling treasury bonds they own.

Allow me to get to the point. This is what the 10-year means to me. As of this writing (May 9, 2018, the 10-year’s nominal rate is right around 3.00%.[1] I’ve seen it as low as 1.40% during the course of my career.[2] Over the last 60 years the average yield (nominal) has been 6.09%.[3] That number is a bit skewed, however, because of the insanely high interest rates of the early to mid-1980s. For all intents and purposes, the interest rate environment is normalizing. The economy seems to be strong enough to withstand rising rates. Those are two bits of good news, if you ask me.

It also means that you need to be careful in what capacity you own bonds, and also what types of bonds you own. Rising interest rates makes bond ownership tricky. As always, if you have any questions or concerns about your specific bond situation don’t hesitate to reach out. I’ve been working with bonds on behalf of clients for over 12 years now.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the US Government as to the timely payment of principle and interest, and, if held to maturity, offer a fixed rate of return and fixed principle value. Past performance is no guarantee of future results.

[1] Source: www.cnbc.com. Data taken May 9, 2018

[2] Source: www.cnbc.com. Data taken May 9, 2018

[3] Source: https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets/viewer. Data taken Data taken May 9, 2018.

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