The US 10-Year Treasury Yield and the Stock Market
— a Complete Guide to the Yield-Curve Inversion and Real Rates
The US 10-year Treasury yield (US 10Y Treasury Yield) is the benchmark discount rate for global markets and a competitor to risky assets. We break down, from the mechanism up, why growth stocks crumble when this yield rises and tech stocks rebound when it falls.
What Is the 10-Year Treasury Yield?
It's the yield on the 10-year Treasury bond issued by the US Treasury Department. Assuming the US government doesn't default, it's treated as effectively the risk-free rate. Every investment asset's expected return is determined by adding a risk premium on top of this 10-year yield. So when the 10-year yield rises, the expected return that risky assets like stocks and real estate need to offer also rises, which lowers their theoretical price.
Market Reaction by 10-Year Yield Level
| 10-Year Yield Level | Market Environment | Relatively Strong Assets |
|---|---|---|
| 2% or below | Ultra-low-rate (QE era) | Growth stocks, REITs, gold |
| 2–3% | Normal, accommodative environment | Balance of growth and value |
| 3–4% | Tightening pressure begins | Value stocks, financials |
| 4–5%+ | Strong tightening pressure | Short-term bonds, cash, energy/materials |
The Inverse Relationship With Growth Stocks
Most of the profit from a growth stock (high-PER names in tech, biotech, etc.) arrives far in the future. In a DCF (discounted cash flow) model, a higher discount rate sharply shrinks the present value of profit that's far out. This is why a high-PER growth stock falls far more than a value stock when the 10-year yield rises by 1%p.
Conversely, a low-PER value stock, or a company that's generating cash right now, is relatively less affected by a rate increase.
Yield-Curve Inversion — a Leading Recession Signal
A state where the 2-year Treasury yield > the 10-year Treasury yield is called a Yield Curve Inversion. Normally the long-term rate should be higher, so an inversion signals that "the market expects a recession and rate cuts after this period of short-term high rates."
- Since the 1970s, every US recession has been preceded by a 2-10 year inversion
- That said, the lag from an inversion to an actual recession is usually 6–24 months
- The point when the inversion resolves (normalizes) is often actually closer to the start of the recession, so don't mistake the resolution itself for a relief signal
A yield-curve inversion often happens when short-term rates spike as FOMC rate hikes continue.
Real Rates and Stock Prices
Real rate = nominal 10-year yield − expected inflation (BEI)
Even if the nominal rate is 5%, if expected inflation is 4%, the real rate is only 1%. When the real rate is low (even negative), gold, commodities, and growth stocks tend to be strong. When the real rate rises, the cost of holding cash falls, which reduces the relative appeal of risky assets. When CPI inflation is high, the real rate can be lower even at the same nominal rate.
The 10-Year Yield and the Dollar/Won Exchange Rate
When the 10-year yield rises, global capital flows into US Treasuries, producing dollar strength. Dollar strength raises the KRW/USD exchange rate, affecting a Korean investor's unrealized gains and losses on US stocks. See the Dollar Index (DXY) and the stock market and how the exchange rate affects US stock returns for detail.