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Tackle Today: Bond Yields & Prices

March 2, 2023

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«Picture a teeter-totter»


Interest rate woes continue to dominate the headlines. Last month’s hotter-than-expected inflation reports created an about-face in bond yields. Since then, the rise in the ten-year yield has been relentless, and the benchmark rate now tops 4% and seems to be eyeing its 2022 peak of 4.3%.

Meanwhile, bond prices have an inverse relationship to yields and have been sliding alongside the stock market. To help you understand the inverse movement of price versus yield, here’s a simple explanation.

Suppose we’re in a low-interest rate environment, and you buy a 10-year bond yielding 2% for $100. That means you’ll get paid $2 of interest annually for the next ten years.

One year later, inflation rears its head, causing interest rates to climb. Now, new 10-year bonds being issued are offering a 4% yield. They are paying $4 of interest annually for the next ten years.

Your bond, that’s paying $2 of interest, is now less attractive than it once was. The only way anyone would buy your bond would be if you discounted the price to make it competitive with the new higher-yielding bonds.

Thus, as yields rise, the price of existing bonds falls.

On another note, be sure to check out this week’s Tales of Technician blog where there is a really interesting discussion on Warren Buffett and dividends!

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