10-year bond

The 10-year bond is a bond issued by the State of a country with a maturity of 10 years.

10-year bond

The most popular 10-year bonds worldwide are the American bonds or 10 year T-note Treasuries , the German Bund bond or the Swiss bond.

Technical characteristics

The 10-year bond has a series of common characteristics:

  • It is listed on the basis of 100 in the secondary or fixed income trading market.
  • It is an asset that serves as collateral against other trading assets and its valuation is very important in accounting for future cash flows.
  • The ten-year bond pays a periodic annual yield called a coupon.
  • It is a reference in the market, since it is one of the pulse and health meters of an economy, being an underlying asset in the trading of derivative products.
  • The investor will receive 9 coupons plus the payment of the principal upon maturity.

It is considered the asset with the best credit rating, since it is the "risk-free" security par excellence of fixed income. The 10-year interest rate curve, historically speaking, tends to be much more stable if we compare it with shorter terms, which is why it offers a greater guarantee, in addition to the security of having a State to back it up.

The 10-year bond in Spain

In recent years, due to financial debt and liquidity crises, the term risk premium for a country has been made known, measured as the difference between this country’s debt and the safest debt. Specifically, we can talk about the fact that Spanish debt rose to 700 basis points at a very difficult time of crisis where the prices of insurance against non-payments or credit default swaps (CDS) rebounded.

10-year bond Spain

The Spanish State came to pay its creditors an annual profitability of 7%, (when in 2000 it had a profitability close to 1.6%) with respect to the safest debt in Europe, which is the Bund and it traded at less than 100 basis points, reaching situations in which many investors had to receive negative rates for the deposit of their money in German debt investments, mainly due to the climate of uncertainty in Spain and the macroeconomic security of Germany.

Over the last few years, there has been a very high degree of speculation in 10-year debt for personal gain, causing false news, ratings downgrades or upgrades by credit rating agencies, unfounded or well-founded rumors and all. type of surprises to take the yield of the bond where it was most optimal for their interests. The legislation, in this aspect, is not developed and it is difficult to stop speculation against a State.

The 10-year bond in the US

On the other hand, in the case of the US, the reference bond is the T-Note. We can say that the largest creditor of its debt is China, this is mainly due to the great crisis that the US has suffered with the subprime, having to carry out liquidity injections to sustain the economy for three consecutive times (QE1, QE2 and QE3 ). The United States had a significant financing gap and China a large surplus and plenty of liquidity.

China has a great influence on the American economy. Should China choose to stop buying US debt, it would leave one of the largest capital flows into the country, making it more difficult for companies to obtain loans, which would increase interest rates and loans. prices of raw materials to consumers. If China started selling America’s debt, essentially cashing in on its government bonds, it would actually take money out of the American country’s economy and create an even more dire situation.

Another issue is the disparity between the currencies. In the global economy, the dollar has much more purchasing power than the yuan (the name of the Chinese currency). This makes American products more expensive to export to foreign countries than Chinese products. Therefore, China’s prices for manufactured goods are much more competitive than those in the United States.

Example

The structure of the cash flows of a 10 million bond with a term of five years and an interest of 6% per year (annual coupon), would be the following:

  1. Disbursement of 10 million euros.
  2. An interest payment of € 600,000 in one year.
  3. An interest payment of € 600,000 over two years.
  4. An interest payment of € 600,000 over three years.
  5. An interest payment of € 600,000 over four years.
  6. Upon maturity, I will receive a principal payment of € 10 million over five years plus an interest payment of € 600,000 over five years.
5-year bond