How bond yields work, and why they move opposite to prices

A bond’s coupon tells you what interest it promises. Its yield relates those payments to the price an investor pays. Keeping those ideas separate makes bond-market headlines much easier to read.

A bond is a loan, but terms vary

Buying a bond means lending to an issuer, such as a government or company. A conventional fixed-rate bond promises scheduled interest payments, called coupons, and repayment of its face value at maturity. Those are promises, not a guarantee that every borrower will pay.

Not all bonds work this way. Some have variable rates; zero-coupon bonds do not make periodic interest payments. Start by checking the terms rather than assuming every bond has a fixed coupon.

For a hypothetical fixed-rate bond with a $1,000 face value and a 4% annual coupon, annual interest totals $40. Assuming the issuer pays as promised, the holder receives $1,000 at maturity. The purchase price in the secondary market may be different.

Current yield is not yield to maturity

If that bond trades for $950, its $40 annual interest divided by the price gives a current yield of about 4.2%. At $1,050, the current yield is about 3.8%.

• Price down, yield up. A buyer pays less for the same promised payments.
• Price up, yield down. A buyer pays more for those payments.

Current yield leaves out the difference between the purchase price and the amount repaid at maturity. Yield to maturity incorporates that gain or loss and the timing of the promised payments. It is not a guaranteed realized return: default, selling early or reinvesting coupons at a different rate can change the outcome.

The SEC’s fixed-income bulletin explains this price-yield relationship in more detail.

Why prices move

When comparable market yields rise, an existing fixed-rate bond generally becomes less attractive at its old price. Its price falls, bringing its yield into line with the market. The reverse generally happens when comparable yields fall.

Do not read this as a mechanical response to every central-bank announcement. Market prices can adjust before an anticipated decision, and different maturities need not move together.

Credit risk matters too. Investors considering a borrower that looks less likely to repay may demand a higher yield. Inflation also matters because it reduces the purchasing power of fixed payments. These risks help explain why bonds with similar maturity dates can offer different yields.

What the yield curve shows

A yield curve compares yields across maturities for comparable debt, commonly U.S. Treasury securities. An upward-sloping curve has higher long-term than short-term yields. An inverted curve has lower long-term yields over the maturities being compared.

The New York Fed discusses the relationship between the Treasury yield spread and recession risk in its yield-curve FAQ. An inversion is not a recession announcement or a countdown with a fixed deadline.

Why longer bonds can swing more

Other things equal, a longer-maturity fixed-rate bond is generally more sensitive to changes in market yields than a shorter one. Coupon size also affects that sensitivity. Duration is a measure used to assess interest-rate sensitivity; it is not simply another name for years until maturity.

That helps explain why a bond fund’s value can fall as rates rise, even while its holdings continue making interest payments. A promise to repay an individual bond’s face value at maturity does not promise an unchanged market price along the way.

When you read that yields rose, ask which bonds, which maturities and which measure of yield. The inverse price relationship is useful, but it applies to the bond being repriced—not automatically to every bond in the market.

This explainer is general education, not investment advice. Consider speaking to a qualified adviser about your own situation.