Bonds get lumped in as "safe investing," but how their price is set — and why it moves opposite to rates — is surprisingly confusing. Getting the basics makes market news much easier to read.
What a bond is
A bond is an IOU issued by a government or company to borrow money. You buy the bond, receive a set interest payment (the coupon), and get your principal (the face value) back at maturity. The key terms are face value, coupon, and maturity.
Why price and yield move in opposite directions
An already-issued bond's coupon is fixed. But when market rates change:
- When market rates rise, newly issued bonds pay more. The older, lower-coupon bond becomes less attractive, so its price has to fall to give a buyer the same yield.
- When market rates fall, the older bond (with its higher coupon) becomes attractive, so its price rises.
That's why a bond's price and its yield move inversely. "Rates went up" and "bond prices fell" are essentially the same statement.
Maturity and duration
How sensitive a bond's price is to rate changes is called duration. Generally, the longer the maturity, the longer the duration — and the bigger the price swing for the same move in rates. That's why long-dated bonds carry more interest-rate risk.
Credit rating and credit spread
The risk that the issuer can't repay (credit risk) is also priced in. The lower the credit rating, the higher the yield (spread) it must offer to sell. When this credit spread widens during stress, it signals rising risk aversion.
The role bonds play
- Income: regular interest payments.
- Diversification: they often move differently from stocks, lowering portfolio volatility (not always).
- Ballast: in a crisis, money tends to flow into safe havens — especially government bonds.
How to read it
Treasury yields (especially the US 10-year) and the yield-curve spread are the bond market's thermometer. On the Global Market Dashboard, check the US 2Y/10Y/30Y yields and the 10Y–2Y spread to gauge the rate environment.
This article is for informational purposes only and is not investment advice.