Can someone explain to me why Treasury prices and yields move in opposite directions?
let’s say the market interest rate is 8%. this is the rate that new bonds are issued at in the market. now you have 2 bondholders who each got his bond a year ago. guy A got his bond with a 9% coupon and guy B got his with a 7% coupon. So guy A receives $90 a year on his bond and guy B gets $70 a year on his bond. These are the coupon payments. what do you think is worth more all else the same? of course guy A’s bond is worth more. relative to what you could get in the market today (an 8%, or $80 coupon), guy A’s $90 coupon is worth more. Thus, an investor will pay more than par value for guy A’s bond. Similarly, guy B’s bond is worth less so his is selling at a discount. thus, higher coupon (relative to market interest rates) bonds sell at a premium, and lower coupon (relative to market rates) bonds sell at a discount… again, interest rate up, price down and interest rate down, price up you should go to CFAI text. this is a basic concept that is very important.
i guess from a very inuitive standpoint (no #'s involved), if you are paying for some cash flows (periodic coupon and principal at the end), your yield will be lower if you have to pay a higher price for it.
Well explained guys. Thanks
To add to fine explanations above - this isn’t just Treasuries but virtually all bonds.
just remember there is an inverse relation ship between price and interest rate . be careful as yield also means rate of return. another concept if coupon> yield bond trading at premium if coupon