Why Bond Prices Fall When Yields Rise

No relationship in finance confuses more people than the seesaw between bond prices and yields. Headlines say "bonds sold off" and "yields surged" about the same event. Here is the whole mechanism in one example.

The seesaw

Say you buy a newly issued Treasury bond for $1,000 paying 4% — $40 a year. Tomorrow, the government issues new bonds paying 5%. Nobody will pay you $1,000 for your 4% bond when $1,000 now buys a 5% one. To sell, you must cut your price until your $40 coupon equals a 5% return for the buyer — roughly $800. Rates rose; your bond's price fell. Run it in reverse and falling rates make existing bonds more valuable.

That's the entire trick: the coupon is fixed, so the price is what adjusts.

Duration: the size of the swing

How hard the seesaw swings depends on time to maturity. A bond maturing next month barely cares about rates — you'll get face value back almost immediately regardless. A 30-year bond is a 30-year bet on rates, and its price can move like a stock. This sensitivity is called duration, and it is why "safe" long-term Treasury funds lost a third of their value when rates jumped in 2022 — no defaults, pure seesaw.

Why the 10-year yield runs the world

The 10-year Treasury yield is the benchmark "risk-free" return that everything else is priced against. Mortgage rates sit on top of it. Corporate borrowing is quoted as a spread above it. Stock valuations discount future profits against it. When the 10-year moves fast, everything repriced against it moves too — which is why equity investors watch a bond number.

What the yield curve whispers

Normally, longer loans pay higher yields. When short-term yields rise above long-term ones — an inverted curve — markets are betting the Fed will have to cut rates in the future, historically a recession signal. It is not a timer, but it has preceded most modern U.S. recessions, which is why the phrase gets so much airtime.