zerohedge.com / By Tyler Durden / 04/25/2013 21:37
We recently showed 220 years of US Treasury bond yield history but all too often, the average investor is unfortunately unaware of the relationship between bond yields (interesting on a relative-value perspective) and bond prices (the thing that matters for your portfolio’s returns). The two measures are inextricably linked obviously (a higher yield implies a lower price and vice versa) but the relationship is not a straight line – it has ‘convexity’. The following charts may help understand the upside-downside changes from ‘yield’ movements, what the Fed is doing to the relationship, and how inflation expectations impact these changes.
Via Goldman Sachs:
Bonds are loans that investors make to governments, municipalities or companies, which typically pay the investors a fixed rate of interest until the bonds mature and the loans are repaid.
The most well-known US government bond is the 10-year US Treasury bond, which matures ten years from the issue date. Right now, investors can purchase a bond for $100 with a yield of about 1.7%, or about $1.70 per year – almost nothing! But there is a bond market that moves daily, so the price of bonds will move depending on interest rates and the economy.