Why the 10-year US Treasury yield matters for your portfolio ['Beginner's W100m project']

If you follow the stock market, you have probably heard the phrase "the 10-year US Treasury yield rose" in the news. But why does a US government bond rate keep showing up in stories about Samsung Electronics, SK Hynix and the Kospi?

According to Investing.com, the 10-year US Treasury yield stood at 4.61% on Wednesday, down 0.3 basis points (1 bp = 0.01 percentage point) from the previous session. The 2-year yield, which is more sensitive to Federal Reserve monetary policy, closed up 0.7 basis points at 4.30%. While the 2-year yield reflects near-term expectations for Fed policy, the 10-year yield captures the market's longer-term outlook on economic growth, inflation and fiscal policy.

To understand why, it helps to start with what a government bond actually is. A government bond is a debt instrument the government issues to raise funds — essentially a promissory note in which it borrows money from investors and agrees to repay the principal plus interest after a set period. Among all government bonds, the 10-year US Treasury has become the world's most widely watched long-term interest rate benchmark, thanks to its deep liquidity and active trading.

The yield that appears in news reports is not the rate set when the government originally issues a bond. It is the return implied by the bond's current market price as investors buy and sell it. Because prices shift constantly as investors trade, the yield moves in real time.

Bond prices and yields move in opposite directions. Consider a bond that pays 50,000 won in annual interest. If you buy it for 1 million won, your yield is 5 percent. If the same bond's price rises to 1.1 million won, the interest payment stays at 50,000 won, so the yield falls to roughly 4.5 percent. Conversely, if the price drops, you receive the same interest for less money, pushing the yield higher. In short, strong demand drives prices up and yields down; heavy selling drives prices down and yields up.

The 10-year US Treasury yield is therefore a real-time reflection of how investors collectively view the economic outlook. When expectations for a recovery strengthen or inflation is seen picking up, yields tend to rise. When growth concerns mount or demand for safe assets increases, yields tend to fall.

This is why the 10-year Treasury is more than just a bond-market rate — it is the benchmark market rate for the broader financial system. Because it serves as one of the reference points for the discount rate used to value companies, as well as for corporate borrowing costs, it has a direct bearing on equity markets.

That is why market participants watch the 10-year yield alongside the Fed's benchmark interest rate. Its influence is especially pronounced during periods like the current AI investment boom. Because AI companies' share prices heavily reflect expectations for future earnings, even a modest rise in the discount rate can produce a relatively large swing in their valuations.

The reason stock prices wobble when Treasury yields rise comes down to the discount rate. A company's value is determined by converting its future cash flows into present-day terms, and the rate applied in that conversion is the discount rate. The present value of money to be received in the future is calculated as: future value ÷ (1 + discount rate) raised to the power of the number of periods.

For example, 1 million won to be received 10 years from now is worth roughly 740,000 won in today's terms at a 3 percent annual discount rate. At 5 percent, that present value shrinks to about 610,000 won — a difference of roughly 130,000 won, even though the future amount is identical.

The 10-year US Treasury yield is one of the key inputs in that discount rate. When it rises, the discount rate applied to corporate valuations rises with it, putting downward pressure on share prices. Conversely, when long-term yields fall, the present value of future earnings increases, creating a more favorable environment for equities.

Growth stocks — particularly AI and platform companies whose share prices heavily price in future growth rather than current earnings — are especially sensitive to changes in the discount rate. The further into the future a company's expected profits lie, the greater the hit to their present value when the discount rate rises.

2022 was a textbook example of the 10-year yield shaking equity markets. After the Russia-Ukraine war sent inflation surging, the Fed began raising its benchmark interest rate in March of that year. In May it delivered a 50-basis-point "big step" hike, then followed with four consecutive 75-basis-point "giant step" increases from June through November. Within eight months, the benchmark rate climbed from a range of 0–0.25 percent to 3.75–4.00 percent.

The Fed's rapid tightening fed directly into the 10-year Treasury yield. Starting the year around 1.6 percent, the yield surged to 4.25 percent by Oct. 24. As long-term yields rose, so did the discount rates used to value companies. Big US technology stocks — whose lofty valuations had been built on expectations of future earnings — faced heavy selling, and the NASDAQ Composite fell roughly 33 percent over the course of 2022, its steepest annual decline since the global financial crisis.

Market participants are paying close attention to the 10-year US Treasury yield's move into the 4.6 percent range. KB Securities said the yield is likely to trade within a 4.2–4.7 percent band for now, and the current level is approaching the top of that range.

KB Securities analyst Kim Il-hyeok said pushing the yield above 4.7 percent would require a combination of factors: a broadening rise in core inflation, an oil price spike triggered by renewed geopolitical tensions around the Strait of Hormuz, further Fed balance-sheet reduction, growing concerns about US fiscal sustainability, and a scenario in which AI stimulates demand more than it boosts productivity. For the yield to fall below 4.2 percent, he said, a catalyst would be needed to ease upward rate pressure — such as concerns about a slowdown in AI investment or a credit event in the private credit market.

Meritz Securities identified prolonged high interest rates as the biggest risk factor for the second half. "Doubts about AI investment are a concern, but the biggest risk we are watching for the second half is the possibility of a Fed rate hike," analyst Yun Yeo-sam said. "We are monitoring the risk that persistently high rates will raise investment costs for hyperscalers and break weaker links such as high-yield bonds."

Hyundai Motor Securities also views the direction of long-term yields as the key variable that will determine which sectors lead the market. "Despite falling oil prices, US Treasury yields have not declined sufficiently," analyst Kim Jae-seung said. "Elevated long-term Treasury yields are a factor limiting sector rotation." He added that a meaningful pickup in foreign net purchases — driven by fading expectations for a Fed rate hike and a weaker dollar — would be needed before sector rotation in the domestic market gains traction. "Until then, it makes sense to stay focused on the semiconductor sector while watching for an inflection point in expectations for the Fed's benchmark rate," he said.

Ultimately, the 10-year US Treasury yield is far more than a bond market return — it is the benchmark market rate that simultaneously reflects the discount rate applied to corporate valuations and broader investor sentiment. That is why investors need to track the 10-year yield alongside the outcome of every Federal Open Market Committee meeting.