Struggling 10-Year U.S. Treasury Note Flirts With Troubling Milestone

Creditors of the world’s most closely watched bond—the 10-year U.S. Treasury note—face the prospect of enduring a historical first: losing money on their investment for a third consecutive year.

Key Takeaways

  • The 10-year U.S. Treasury note, which was originated almost a century ago, never has declined in value for three consecutive years.
  • After falling in 2021 and posting its worst-ever loss last year, it’s down 1.2% so far this year.
  • Investors now can lock in 10-year yields that comfortably exceed annual inflation, which could boost demand for the world’s leading bond—and help it avoid making history.

The 10-year note has lost 1.2% this year after posting its worst loss ever, 17.8%, in 2022 and dropping 4.4% the previous year.

There have never been three straight years of annual declines in the 10-year note, according to available data going back almost a century. Moreover, since 1928, the 10-year note has lost money in just 19 calendar years—meaning it has produced a positive annual return 80% of the time.

Fallout from the Fed’s Fight

Bond prices fall as their yields rise, and the Federal Reserve’s campaign to slash inflation has raised the yield on the 10-year note near 4.30%. That’s eight-and-a-half times higher than just three years ago, during the height of pandemic shutdowns, and the highest trading range since 2007. Historically low yields then reflected surging demand for the 10-year note from frightened investors seeking a safe haven for their assets. It gained 11.3% in 2020, its highest annual return since 2011.

But it’s piled up losses since then, with the bulk coming after the Fed began steadily raising its benchmark lending rate a year-and-a-half ago to combat the worst U.S. inflation in four decades.

U.S. Budget Complications

While disappointing investors, the 10-year note’s struggle represents somewhat of a conundrum for the U.S. government, which relies on investments in it as a key source to fund its operations.

The market value of the government’s outstanding debt reached an all-time high of $25.1 trillion at the end of July; 55% of that amount consists of Treasury notes with 2- to 10-year maturities.

Each ensuing Fed rate hike has lessened the value of previously issued bonds, and investors shy away from buying bonds when they perceive the possibility of attaining higher yields in the future.

At the same time, the U.S. Treasury has had to boost the rates it offers on 10-year notes via its routine auctions to attract more investment bidders. Though that raises its borrowing costs, the Treasury has little choice: It needs funds to fill the $1.6 trillion budget deficit it has accrued so far in fiscal 2023.

Will Higher Yields Cure Higher Yields?

Investors have sold Treasury notes at a rapid pace in recent weeks after Fitch Ratings downgraded U.S. debt to AA+ from its highest rating of AAA. S&P Global also lowered U.S. debt’s rating during 2011’s debt-ceiling showdown.

As of early Friday, the 10-year yield had surged almost 50 basis points since mid-June, even as the Fed temporarily halted its rate-hike campaign.

The increase, however, may lure more investors. That’s because they can lock in long-term yields for the next decade that now comfortably exceed annual U.S. inflation, which measured 3.2% in July.

Such demand, if it materializes, would apply downward pressure on yields. In turn, that just may help the 10-year note avoid making rather dubious history.

Leave a Comment