Price-Yield Inverse Relationship
The fundamental bond market law: when yields rise, bond prices fall; when yields fall, bond prices rise — always and mechanically.
The price-yield inverse relationship is the most fundamental concept in fixed income. A bond's price is the present value of its future cash flows discounted at the current market yield. When yields rise, the discount rate increases, and the present value of those cash flows — and therefore the bond's price — falls.
This is not a tendency — it is a mathematical identity. A 30-year Treasury with a duration of ~18 will fall approximately 18% in price if yields rise 100 basis points from purchase.
Understanding this is critical for equity traders: when yields spike (bond sell-off), high-duration equities (growth stocks, long-duration tech) get hit hardest. The 2022 rate-rise cycle delivered some of the worst bond returns in history — and equity multiple compression followed exactly as bond math predicts.
Related Terms
Basis Point
One hundredth of one percentage point (0.01%) — the standard unit for quoting changes in interest rates, yields, and credit spreads.
BeginnerBond
A debt instrument in which the issuer borrows money from the buyer and promises to pay periodic interest plus return the principal at maturity.
BeginnerBond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerConvexity
The curvature in the price-yield relationship of a bond — measuring how duration itself changes as yields move, improving accuracy of price change estimates.
AdvancedDuration
A measure of a bond's sensitivity to interest rate changes — the approximate percentage price change for a 1% move in yield.
AdvancedYield to Maturity
The total annualized return an investor earns if they hold a bond to maturity — accounting for coupon payments, price paid, and time remaining.
Intermediate