Bonds and yields explained: prices, duration, the yield curve and why traders watch them

A bond is a loan: an investor lends money to a government or company, receives regular interest payments (the coupon) and gets the face value back at maturity. A bond's yield is the return implied by its current market price, and because the coupon is fixed, price and yield move in opposite directions: if market yields rise, existing bonds paying the old, lower coupon become less attractive and their prices fall. Even traders who never buy a bond watch yields closely, because government bond yields are the market's live estimate of where interest rates are heading, and interest rates drive currencies and equity valuations.

The basic vocabulary

• Issuer: the borrower. Governments issue sovereign bonds (US Treasuries, German Bunds, UK gilts, Japanese government bonds); companies issue corporate bonds.
• Face value (par or principal): the amount repaid at maturity, often quoted as 100.
• Coupon: the fixed interest rate paid on the face value, usually annually or semi-annually. A 4% coupon on a 100 face value bond pays 4 a year.
• Maturity: the date the face value is repaid. Government bonds range from short-term bills of a few months to bonds of 30 years or more.
• Price: what the bond trades for in the market, quoted as a percentage of face value. A price of 98 means 98% of face value.
• Yield: the annual return implied by buying at today's price and holding to maturity (the yield to maturity), taking into account the coupons and the gain or loss as the price converges to par.
• Credit risk: the risk that the issuer does not pay. Major governments borrowing in their own currency are generally treated as very low credit risk, which is why their bonds serve as the benchmark "risk-free" rate. Corporate and riskier sovereign bonds pay a higher yield, the credit spread, to compensate.

The yield glossary entry and basis point entry are quick references. Yields are usually discussed in basis points: one basis point is 0.01 percentage points, so a move from 4.00% to 4.25% is 25 basis points.

Why prices and yields move in opposite directions

This is the single most important idea in bonds, and it is easier to see with numbers than to explain in words.

Worked example: a one-year bond

Illustrative numbers only. A government issues a one-year bond with face value 100 and a 4% coupon. At maturity it will pay 104 (the 100 face value plus a 4 coupon).

• If the market yield for one-year government debt is 4%, investors will pay 104 ÷ 1.04 = 100. The bond trades at par.
• If market yields rise to 5%, new one-year bonds offer 5%. Nobody will pay 100 for a bond that returns only 4, so its price falls until it offers 5% too: 104 ÷ 1.05 ≈ 99.05.
• If market yields fall to 3%, the 4% coupon is attractive, and the price rises: 104 ÷ 1.03 ≈ 100.97.

The cash flows never change; only the price investors are willing to pay for them changes. When the bond market "sells off", prices fall and yields rise. When it "rallies", prices rise and yields fall. Headlines use both languages, so keep the inverse relationship in mind.

Current yield versus yield to maturity

The current yield is simply the coupon divided by the price: a 4 coupon on a bond priced at 95 gives a current yield of about 4.2%. The yield to maturity also counts the 5-point gain as the price rises back to 100 at maturity, so it is higher still. When analysts refer to "the 10-year yield", they mean the yield to maturity on the benchmark 10-year government bond.

Duration: how sensitive is a bond to rates?

Not all bonds react equally to a change in yields. A one-year bond's price barely moves, because its cash flows arrive soon. A 30-year bond's price can move dramatically, because most of its value lies in payments decades away, and those are heavily affected by the discount rate.

Duration puts a number on this. The version most traders use, modified duration, tells you the approximate percentage change in price for a one-percentage-point change in yield.

Worked example: duration in practice

Illustrative numbers only.

• A two-year government bond with a modified duration of about 1.9: if its yield rises by 0.50 percentage points, its price falls by about 1.9 × 0.50 = 0.95%.
• A ten-year bond with a modified duration of about 8: the same 0.50-point rise in yield cuts its price by about 8 × 0.50 = 4%.
• A thirty-year bond with a modified duration of about 17: the same rise cuts its price by about 8.5%.

Duration rises with maturity and falls with a higher coupon, because a bond paying larger coupons returns more of its value earlier. The approximation works best for small yield moves; for large moves, a further effect called convexity becomes relevant, but the direction and rough scale are what matter for most readers.

When duration bites: the UK gilt market in 2022

After the UK government's fiscal statement of 23 September 2022, long-dated gilt yields rose very sharply in a few days. Long-dated bonds have high duration, so their prices fell steeply. Many pension schemes used liability-driven investment (LDI) strategies with leveraged gilt positions, and the price falls triggered collateral calls that forced sales of gilts, pushing yields higher still. On 28 September 2022 the Bank of England announced temporary purchases of long-dated gilts to restore market functioning, running until 14 October. Sterling was also highly volatile in the same period. The episode is a clear example of duration, leverage and forced selling interacting, and of how a bond market shock can spill over into currencies.

The yield curve

Plot the yields on a government's bonds against their maturities, from three months to 30 years, and you get the yield curve. The yield curve glossary entry has a short definition; here is how traders read it.

What sets each part of the curve

• The short end (up to about two years) is anchored by the central bank's policy rate and expectations of where it will go over the next couple of years. The two-year yield is often treated as a gauge of expected policy.
• The long end (ten years and beyond) reflects expected average short rates over a long period, plus a term premium for tying money up for longer, and is influenced by inflation expectations, growth prospects, government borrowing needs and global demand for safe assets.

Common shapes

• Normal (upward-sloping): long yields above short yields. This is the usual shape, reflecting the term premium.
• Flat: little difference between short and long yields, often when policy is expected to change direction.
• Inverted: short yields above long yields. This usually happens when a central bank has raised rates to restrain inflation and markets expect cuts later. In the US, inversions have often preceded recessions, which is why commentators watch the gap between the two-year and ten-year yields, but the lag has been long and variable and the signal is not reliable on its own. The US curve was inverted for an extended period after 2022.
• Steepening and flattening: changes in the gap. A "bear steepener" means long yields are rising faster than short ones; a "bull steepener" means short yields are falling faster than long ones, often when rate cuts are expected.

Why bond yields matter to forex traders

Currencies respond to expected interest rate differentials, a point covered in central banks and interest rates. Government bond yields, especially two-year yields, are a market-priced, minute-by-minute measure of those expectations.

• Yield spreads: traders compare, say, the US two-year yield with the German two-year yield. A widening gap in favour of US yields has historically tended to go along with a stronger dollar against the euro, though the relationship is loose and breaks down at times.
• Data reactions: when a US inflation report comes in above consensus, short-dated Treasury yields often rise in seconds as markets price a more restrictive Fed, and the dollar often moves with them. The guide to how economic data moves forex shows how this chain works.
• Safe-haven flows: in stress, money often flows into the most liquid government bonds, pushing their yields down. Currencies seen as havens can strengthen at the same time; see the safe haven glossary entry.
• Japan: for years, the Bank of Japan's control of Japanese government bond yields kept them very low, and the gap with US yields was widely cited as a driver of USD/JPY. The USD/JPY pair profile covers that history.

Why bond yields matter to equity and commodity traders

• Valuations: share prices reflect the present value of expected future earnings. Higher yields raise the discount rate and make those future earnings worth less today, which has tended to weigh on companies whose value depends on profits far in the future, such as many technology stocks.
• Competition for capital: when government bonds yield more, they compete with dividends and equities for investors' money.
• Borrowing costs: corporate borrowing is priced off government yields plus a credit spread, so rising yields affect company finances.
• Gold: gold pays no income, and inflation-adjusted (real) yields have historically been one of the influences on its price. See gold and silver explained.

None of these links is mechanical. They describe tendencies that have shown up over time, and other forces can dominate for long periods.

How retail traders get bond exposure

Buying bonds directly or through funds

Retail investors can buy some government bonds directly (several governments sell to the public) or through a broker, and can hold bond funds and bond ETFs. Owning bonds this way has no leverage and the income comes from coupons, but price risk still applies if you sell before maturity. The ETFs explained guide covers bond ETFs in context.

Bond futures

Exchanges list futures on major government bonds, such as US Treasury futures on CBOT (part of CME Group) and German Bund, Bobl and Schatz futures on Eurex. The Euro-Bund future, for example, is based on a notional German government bond with a 6% coupon and a nominal value of 100,000 euros. Futures prices move like bond prices, not like yields: when yields rise, bond futures fall. The general mechanics of margin, expiry and rollover are covered in how commodity futures work, and they apply to financial futures in the same way.

Bond CFDs

Some providers offer CFDs priced from government bond futures. You can go long (gaining if prices rise, meaning yields fall) or short (gaining if prices fall, meaning yields rise). A few points to understand before trading them:

• The price is a bond futures price, not a yield. A position that benefits from rising yields is a short.
• They are usually futures-based, with expiry or roll dates tied to the quarterly futures cycle.
• Leverage is capped under ESMA and FCA rules for retail clients; check the leverage and margin your provider applies to this asset class. The margin calculator helps you see the cash required.
• Bond futures can gap around central bank decisions, inflation releases and government budget announcements.

Worked example: a bond futures CFD

Illustrative numbers only. A provider offers a CFD on a government bond future where 1 point is worth 10 euros per contract. The price is 130.00. You believe yields may rise, so you open a short position of 2 contracts at 130.00.

• Yields rise and the future falls to 128.80. Gain = (130.00 − 128.80) × 10 × 2 = 1.20 points × 10 euros × 2 contracts = 24 euros, before costs.
• If instead yields fall and the future rises to 131.50, loss = 1.50 × 10 × 2 = 30 euros, before costs.

The point value differs widely between providers and products, so calculate it for your specific contract. The profit and loss calculator can do the arithmetic.

Common mistakes

• Confusing price and yield. "Bonds fell" means yields rose. Getting this backwards reverses your position.
• Ignoring duration. A long-dated bond can move several per cent on a yield change that barely moves a short-dated one.
• Treating the yield curve as a timer. Inversions have often preceded US recessions, but with lags that have varied widely; the curve is not a precise signal.
• Assuming a fixed relationship between yields and currencies. Yield spreads matter, but risk sentiment, intervention and other factors can override them.
• Overlooking event risk. Central bank decisions, inflation data and budgets can move bond futures sharply and cause gaps; see gap risk and weekend risk.
• Forgetting that "safe" bonds can lose money. Government bonds carry little credit risk, but their prices fall when yields rise, sometimes substantially.

Trading bond CFDs or futures with leverage carries a high risk of loss, as with any CFD; most retail CFD accounts lose money. Read the risk warning before trading.

Frequently asked questions

Why do bond prices fall when yields rise?

Because a bond's coupon is fixed. When market yields rise, new bonds offer more income, so an existing bond with a lower coupon is only attractive at a lower price. The price falls until its yield matches the market.

What is the 10-year yield?

It is the yield to maturity on a government's benchmark ten-year bond, such as the 10-year US Treasury or the 10-year Bund. It is widely used as a reference for long-term borrowing costs and as an indicator of growth and inflation expectations.

What does an inverted yield curve mean?

It means short-term government bonds yield more than long-term ones. It usually reflects high current policy rates and expectations that rates will fall later. In the US, inversions have often come before recessions, but the timing has varied and it is not a reliable signal on its own.

How do bond yields affect currencies?

Currencies tend to respond to changes in expected interest rate differentials, and short-dated government bond yields are a market measure of those expectations. When one country's yields rise relative to another's, its currency has often strengthened, although the relationship is not fixed.

What is duration?

Duration measures how sensitive a bond's price is to changes in yield. A modified duration of 8 means the price falls by roughly 8% if yields rise by one percentage point. Longer maturities and lower coupons mean higher duration.

Can I trade bonds with a CFD?

Some providers offer CFDs priced from government bond futures. A long position gains when bond prices rise (yields fall) and a short gains when prices fall (yields rise). They are leveraged, carry expiry or roll terms, and involve the same high risk of loss as other CFDs.