RiskPicksWhat is a Treasury?
A Treasury is a bond issued by the United States Department of the Treasury to fund government spending. Because they are backed by the full faith and credit of the US government, Treasuries are considered the safest investment in the world. Their yields serve as the baseline for pricing risk across all financial markets.
Types of Treasuries
- T-Bills: short term (4 weeks to 1 year). Sold at a discount, pay face value at maturity
- T-Notes: medium term (2 to 10 years). Pay interest every six months
- T-Bonds: long term (20 to 30 years). Pay interest every six months
- TIPS: inflation-protected. Principal adjusts with the Consumer Price Index
Why the 10-year Treasury matters to stock traders
The 10-year Treasury yield is the single most watched number in global finance. It affects everything:
- Mortgage rates: banks price home loans off the 10-year yield
- Stock valuations: higher yields make future corporate earnings worth less in today's dollars, which pressures stock prices (especially growth stocks)
- Risk appetite: when the 10-year yield spikes, money flows out of stocks and into bonds. When it drops, money does the opposite
- Market Mood: the RiskPicks Market Mood score includes the 10-year Treasury as one of its 9 macro factors
Yield curve
The yield curve plots Treasury yields across different maturities. Normally, longer maturities pay higher yields. When short term yields exceed long term yields (an inverted curve), it has preceded every US recession since 1970. The RiskPicks Market Mood score tracks the 10Y-2Y spread for this reason.
When you hear "the 10-year is at 4.5%" on financial news, they mean the 10-year Treasury note yield. If it is rising sharply, expect pressure on growth stocks.