A bond is a debt instrument issued by a government or company to borrow money. The buyer receives interest on a set schedule and gets the principal back at maturity. The yield is the rate of return a buyer would receive by purchasing at the current market price and holding until maturity.
Price and Yield Always Move in Opposite Directions
Suppose a bond pays fixed interest of 40 dollars per year.
- If the bond's price falls, new buyers pay less but still receive the same interest → the yield rises
- If the bond's price rises → the yield falls
Why the US 10-Year Yield Matters
The US 10-Year Treasury Yield is considered the "world's benchmark interest rate."
- It is used to set mortgage rates in the US
- It is used as the discount rate when valuing stocks. If the yield surges, tech stocks tend to come under pressure
- The Real Yield (the yield minus expected inflation) has a clear inverse relationship with the gold price
What Is the Yield Curve?
It is a line connecting the yields of bonds with different maturities, such as 3 months, 2 years, 10 years, and 30 years.
| Shape | Characteristic | Commonly Interpreted Meaning |
|---|---|---|
| Normal | Longer maturities have higher yields than shorter ones | The economy is normal |
| Flat | Yields are close together across all maturities | The economy is in transition |
| Inverted | Shorter maturities have higher yields than longer ones | The market expects interest rates to be cut in the future because the economy may slow or fall into recession |
Historically, an inverted yield curve (especially 2-year versus 10-year) has occurred before several US recessions, but the time lag is uncertain, and it is not always an accurate predictor.
The 2-year yield is a good reflection of near-term expectations for Fed policy, while the 10-year yield reflects views on long-term growth and inflation.
For education only, not investment advice. Figures change over time, so check official sources before making decisions.