World Map for Stocks #05: What are Long-Term Interest Rates? Why Does the Stock Market Watch the US 10-Year Treasury?
“US long-term interest rates have risen, weighing on stock prices.” In market news, the US 10-year Treasury yield often appears as a key factor explaining stock price movements. Even though it is a bond figure, why do people watching not only US stocks but also Japanese stocks care about it?
Long-term interest rates are rates applied to money with a long period until repayment. The Bank of Japan defines long-term interest rates as those with a duration exceeding one year, citing the yield on 10-year government bonds as the representative example. When news mentions “US long-term interest rates,” it also frequently refers to the US 10-year Treasury yield.
As we have seen previously, the yield here is not a rewriting of the interest rate set at the time of issuance. US Treasuries are bought and sold in the market; if the price falls, the yield rises, and if the price rises, the yield falls. The US 10-year Treasury yield is a figure representing the rate of return the market demands for a period of about 10 years.
The difference from the policy rate is also important. The FRB strongly influences short-term rates, such as overnight rates, through monetary policy. It does not directly set the US 10-year Treasury yield every day. However, if the market believes that “policy rates will remain high for the foreseeable future,” that view also influences the 10-year bond. Today’s policy rate and expectations for future policy rates are different things.
Long-term interest rates can be thought of as being divided into two main parts. One is the average of short-term interest rates expected over that period. The other is the difference between the long-term interest rate and the average of short-term interest rates expected over that period. This is called the “term premium.”
Over the course of 10 years, prices, the economy, and monetary policy may move in directions different from expectations. Supply and demand for government bonds may change, and there is a possibility that prices will fluctuate significantly along the way. This uncertainty, as well as the role that long-term government bonds play in combination with other assets, is related to the term premium.
The term premium is not necessarily always positive. When long-term government bonds are strongly sought after as a hedge against stock price declines, it can become negative. Also, neither future short-term interest rate expectations nor the term premium are figures that can be directly observed in the market. They are estimates using economic models and the like, and there is uncertainty in how they are divided.
The first reason the US 10-year Treasury is watched is that it serves as a benchmark for considering other interest rates. US Treasury yields are used as a starting point for considering borrowing conditions such as mortgages and corporate bonds. Actual borrowing rates are determined by using US Treasury yields as one of the benchmarks, reflecting the possibility of non-repayment, the borrowing period, and circumstances specific to each product.
If the 10-year Treasury yield moves, it does not mean that all interest rates move by the same amount. Even so, the impact can spread to the funding environment for households and companies.
The second reason is that it relates to the benchmark for considering the value of stocks. When converting the future profits generated by a company into present value, government bond yields are one of the materials used to consider the discount rate. If the yield obtained from government bonds rises, the return that investors demand for risky stocks may also change. This leads to the path we saw earlier: “when interest rates rise, stock prices tend to fall.”
The third reason is that the movements of the US 10-year Treasury yield reflect market outlooks. It may rise due to expectations that the economy will strengthen and future policy rates will become higher, or it may involve concerns about inflation, a rise in the term premium, or changes in the supply and demand for government bonds. Even with the same 0.2 percentage point increase, the content is not necessarily the same.
For example, if long-term interest rates rise while expectations for the economy and corporate profits are strengthening, the rise in interest rates may weigh on stock prices, but expectations for profits may outweigh that. Conversely, if long-term interest rates rise due to concerns about inflation while the economic outlook remains unchanged, the pressure on stock valuations may intensify.
Therefore, you cannot decide the reason just by looking at price movements, saying “stocks fell because the US 10-year Treasury yield rose.”
The path to Japanese stocks is also not a single one. A rise in US interest rates can affect the valuation of US stocks, and that movement can spill over to Japanese stocks. Views on the interest rate differential between Japan and the US may change, which can also affect the earnings forecasts of Japanese companies through the dollar-yen exchange rate.
However, exchange rates are not determined solely by interest rate differentials, and the impact of a weaker or stronger yen varies by company. It is necessary to verify each reaction along the way one by one.
The US 10-year Treasury does not tell you everything. Views on monetary policy in the near future may be more strongly reflected in shorter-term government bonds. To look at long-term price views and interest rate risks, one may also check real interest rates, expected inflation rates, and the term premium. The 10-year Treasury is an important point where much information intersects, but it is not the market’s answer itself.
When I see news about long-term interest rates, I want to see not just the rise and fall of the numbers, but what moved them. Did expectations for future policy rates change? Did the outlook for prices or the economy change? Did the term premium move? And are stocks, exchange rates, and corporate bonds moving in a way that matches the same explanation?
It is important to leave parts that cannot be confirmed as “still unknown” and not to explain the entire market with a single reason.
Next time, “What is inflation, anyway?” We will look at how changes in prices, which have appeared many times as a factor moving long-term interest rates, connect to households, companies, monetary policy, and the stock market.
Reference Materials
Bank of Japan “Long-term Interest Rates”
https://www.boj.or.jp/about/education/oshiete/glossary/market/m09.htm
Bank of Japan “Government Bond Yields”
https://www.boj.or.jp/about/education/oshiete/glossary/market/m11.htm
Federal Reserve Board “Three-Factor Nominal Term Structure Model”
https://www.federalreserve.gov/data/three-factor-nominal-term-structure-model.htm
Federal Reserve Board “Monetary Policy, Price Stability, and Equilibrium Bond Yields”
https://www.federalreserve.gov/newsevents/speech/clarida20191112a.htm
Federal Reserve Bank of St. Louis “How are benchmark borrowing costs measured?”
https://fredblog.stlouisfed.org/2026/05/how-are-benchmark-borrowing-costs-measured/
Federal Reserve Bank of San Francisco “Stock Market Valuation and the Macroeconomy”
https://www.frbsf.org/wp-content/uploads/el2017-33.pdf
Disclaimer
The content of this article and this account is intended to provide information for learning about finance, the economy, and market mechanisms. It does not recommend the purchase or sale of specific financial products and does not provide investment advice. It does not guarantee future market trends or investment results. Please make investment decisions at your own responsibility.
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