Yield

A bond pays a fixed coupon and repays its face value at maturity. Its yield is the return you would earn if you bought it at today's market price and held it to maturity, expressed as an annual percentage. Because the coupon is fixed, the yield changes as the price changes: when bond prices rise, yields fall, and vice versa.

Example

Illustrative figures: a bond with a face value of 100 pays a 4 coupon each year. Bought at 100, its current yield is 4%. If the price falls to 95, the same 4 coupon is 4.2% of the price, and the yield to maturity is higher still because you also gain 5 when it is repaid at 100. If the price rises to 105, the yield drops below 4%.

Why forex traders watch yields

Government bond yields reflect what markets expect central banks to do with interest rates, as well as inflation and risk. Differences between countries' yields, especially on two-year bonds, which are closely tied to expected policy rates, often line up with moves in exchange rates. When US two-year yields rise relative to German or Japanese ones, the interest rate differential widens in the dollar's favour.

Commonly watched yields include US Treasuries (2-year and 10-year), German Bunds, UK gilts and Japanese government bonds.

Common misconceptions

• A rising yield is not always good for a currency. If yields rise because investors fear a country's finances, the currency can fall at the same time.
• The link changes. Yield differentials and exchange rates can decouple for long periods, especially when risk sentiment or intervention dominates.

See central banks and interest rates, what moves currency prices and the related term yield curve.