Government bond yields are the backbone of every other market. They set the return on the safest asset, which means every other asset, from currencies to stocks to gold, is priced relative to them.
Prices and yields move opposite
A bond pays a fixed coupon. If market interest rates rise, new bonds pay more, so existing bonds must fall in price until their yield matches. That's why "bond yields rose" and "bond prices fell" describe the same event.
Worked example
A 10-year bond pays a 4% coupon and is priced at $100, yielding 4%.
If market yields rise to 5%, its price falls to about $92.28. If they fall to 3%, it rises to about $108.53.
The yield curve
Plot yields for bonds of different maturities and you get the yield curve. Normally it slopes upward: lenders want more to tie money up for longer. When short-term yields rise above long-term yields, the curve is inverted, usually because the central bank has raised rates and markets expect cuts later. Inversions have often come before US recessions, though the timing varies widely.
Why traders of other markets watch yields
- Currencies: rate gaps between countries drive pairs (Module 8). USD/JPY often tracks the US–Japan yield spread.
- Stocks: higher yields raise the cost of capital and make bonds more attractive than stocks, especially high-growth tech.
- Gold: higher real (inflation-adjusted) yields raise the cost of holding gold, which pays nothing.
Key takeaways
- Bond prices and yields move in opposite directions.
- The yield curve plots yields across maturities; it normally slopes upward and sometimes inverts.
- The 2-year yield tracks expected central bank policy; the 10-year reflects longer-run growth and inflation.
- Yields drive currencies, stocks and gold, so watch them alongside any market you trade.