The U.S. Treasury borrows money to fund government operations through the issue of U.S. Treasury securities. Government bonds carry a separate set of names including Treasury bills, notes and bonds. Confusion can arise since the names are sometimes used in a general sense and at other times refer to a specific Treasury issue.
Treasury Notes in the Middle
The full range of Treasury securities have maturities at issue ranging from 13 weeks out to 30 years. Treasury notes fill the middle maturity space between bills and bonds. At issue, Treasury notes have maturities of two, three, five, seven and 10 years. The longest term note is the 10-year note. The Treasury auctions off new 10-year notes about once a month, on or near the 15th of the month.
Importance of 10-year Note
The current yield of the 10-year Treasury note is one of the most widely followed interest rate benchmarks. While the U.S. Federal Reserve policies exert a lot of control over short-term rates, the yield on the long-term Treasury note is set by market supply and demand conditions. Investors bid the rate up or down based on the expectations on the economy and interest rates. The rates of other financial products such as corporate bonds and home mortgages will be compared to or based on the 10-year note rate.
The Long Bond
The 10-year Treasury note is not the longest term bond issued by the U.S. Treasury--the 30-year bond holds that distinction. The Treasury currently does not issue any maturities between the 10- and 30-year terms. The long-term bond fell out of favor as an interest rate benchmark when the Treasury stopped selling the 30-year bond from 2001 until early 2006. During that period, the Treasury replaced the sales of 30-year bonds with additional issue of the 10-year note, making the long-term note the standard for longer term interest rates.
Treasury Note Auctions
New issues of the different Treasury securities, including Treasury notes, are sold through an auction process. Large, institutional investors enter competitive bids for the amounts to buy at a specific yield. The bidders looking for the lowest yields will have their orders filled and those bid rates set the yield for the 10-year note market. Treasury notes also actively trade on the secondary markets, providing a high level of visibility on the current yield and price.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.