If you follow financial news, you will often hear that bonds are selling off while yields are climbing. For beginners that can sound like two different stories. It is actually one story told two ways. A bond’s price and its yield move in opposite directions, and understanding why is one of the most useful pieces of market knowledge you can have, especially in a week when the US 10-year yield has been sitting at its highest level in more than two decades.
A bond is a promise of fixed payments
When a government or company issues a bond, it borrows money and promises to pay it back on a set date. Along the way it pays interest, called the coupon, which is usually fixed when the bond is first sold.
Take a simple example. A bond is issued at £100 and pays £5 a year until it matures. Anyone buying it at £100 earns a yield of 5%. So far, price and yield tell the same story.
What happens when rates change
Now suppose interest rates across the economy rise, and newly issued bonds of the same type pay £6 a year on £100. Nobody will pay £100 for the old bond paying £5 when they can buy a new one paying £6. For the old bond to find a buyer, its price has to fall until its £5 coupon offers a return that competes with the new bonds.
The coupon has not changed, but the price has dropped, so the yield an investor earns by buying it today has risen. That is the see-saw. Rising yields and falling prices are the same event.
The reverse is also true. If rates fall and new bonds pay less, the old bond with its higher fixed coupon becomes more attractive, so its price rises and its yield falls.
It also explains a phrase you will hear often: a bond rally. When traders say bonds are rallying, they mean prices are rising and yields are falling. When they say bonds are selling off, prices are falling and yields are climbing. Headlines can use either language, so it helps to translate one into the other automatically.
Why some bonds move more than others
Not all bonds react equally. A bond with many years left to run locks in its coupon for longer, so a change in rates matters more to its value. Long-dated bonds therefore tend to swing more in price than short-dated ones for the same move in yields. That sensitivity is called duration, and our explainer on duration risk in bonds goes into more detail.
This is why rising long-term yields can hurt investors in long-dated government bonds quite sharply, even though those bonds are often thought of as safe.
What pushes yields up
Yields rise when investors demand more compensation for lending. That can be because they expect higher inflation, expect the central bank to keep rates high, worry about how much a government is borrowing, or simply have more bonds to absorb. Government bond auctions, such as the US 10-year sale due today, are one place where that demand is tested in public. Our guide to how 10-year Treasury auctions work explains what traders look for.
Why it matters beyond bonds
Government bond yields act as a benchmark for borrowing costs across the economy, from mortgages to company loans. Higher yields can weigh on share valuations, because future profits are worth less in today’s money when safe returns are higher. They can also support a currency if they attract overseas buyers. Our piece on how bond yields affect stocks and forex maps those links.
A note for holders of individual bonds
The see-saw matters most to anyone who might sell before maturity. If you hold a high-quality bond to the end, you still receive the coupons and your money back, assuming the issuer pays. The price falls along the way only become real losses if you sell. Traders and funds that mark their holdings to market every day, however, feel those swings immediately, which is why sharp moves in yields can force selling and add to volatility.
The simple takeaway
When you hear that yields are up, translate it as bond prices are down, and the reverse. Once that clicks, a lot of market commentary becomes easier to follow, from gilt headlines ahead of the UK Budget to the moves in Treasuries that ripple across global markets.
If you want to build a clearer picture of how rates, currencies and shares connect in your own trading, our free trader assessment is a good first step and shows where to focus next.
