Bond prices and yields move in opposite directions, and here is the arithmetic

Financial coverage repeats that bond prices and yields move inversely, usually without saying why. The reason is arithmetic and it takes about a minute.

A worked example

Suppose you buy a bond for 1,000 that pays 50 a year. The yield is 5 percent: 50 divided by 1,000.

Now suppose new bonds are issued paying 60 a year. Yours still pays 50, which is fixed and written into the contract. Nobody will pay 1,000 for your bond when they can get 60 elsewhere for the same money.

So the price of your bond falls until the return is competitive. At about 833, your fixed 50 works out to 6 percent. The payment did not change. The price changed, and therefore the yield changed.

Why the maturity matters

A bond maturing next year is barely affected by a change in rates, because you get your money back almost immediately and can reinvest it at the new rate.

A bond maturing in thirty years is affected enormously, because you are locked into the old rate for three decades. This sensitivity is called duration, and it is why long-dated bonds are far more volatile than short-dated ones despite both being described as safe.

What the yield curve is

Plot the yield of government bonds against the time until they mature and you get the yield curve. It normally slopes upward, because lending for longer involves more uncertainty and lenders want compensating.

When it slopes downward, meaning short-dated bonds yield more than long-dated ones, that is an inversion. It says the market expects rates to be lower in future than they are now, which usually means it expects the central bank to be cutting, which usually means it expects the economy to weaken.

Why any of this matters to you

Government bond yields set the reference point for almost every other price in finance. Mortgage rates, corporate borrowing costs and the discount rate used to value shares all key off them. When commentary says "yields moved", it is describing a change in the price of money that eventually reaches everything else.

This is general education and not investment advice.