Basics of Bonds
Price, yield, duration — the language FX traders pretend to know
- Define bond price, coupon, and yield
- Explain the inverse price-yield relationship
- Read duration as the bond's sensitivity to rate changes
Every FX trader nods knowingly when bonds come up. Most have no idea what yield actually means or why prices move inverse to it. Yet bonds drive FX every day. Spend 7 minutes here and you'll understand what most of the market thinks they already do.
Bond = a contract to pay you back
A bond is a loan in security form. The government (or company) borrows £100 from you for 10 years and promises: (1) coupon — annual interest payments (e.g. 4% = £4/year), and (2) face value returned at maturity (£100). You can sell the bond before maturity in the open market — that's where prices come in.
Price up = yield down (inverse)
If a bond pays £4/year forever and you buy it for £100, your yield is 4%. If demand rises and the price climbs to £105, you still get £4/year — but yield is now 4/105 = 3.8%. Higher price = lower yield. Always. This relationship is the spine of every macro trade.
Talks in YIELDS. '10y at 4.2%, up 5bp.' Yield goes UP = bond prices DOWN. Sellers in the market.
Talks in PRICES. '10y bond up 0.3%.' Price up = yield down. Buyers. Same information, opposite framing — confusing across desks.
Duration in one sentence
Duration measures how much a bond's price moves when yields shift. A 10y bond has ~9 years of duration; a 1% yield rise drops its price ~9%. A 2y has ~1.9 years of duration. Long bonds = big swings on small yield moves. This is why the 10y and 30y dominate FX-relevant flows.
US 10y yield rises from 4.0% to 4.5% in one week. The 10y bond's price will...
- Bond = loan with coupon + face value
- Price ↑ → Yield ↓ (inverse, always)
- Duration = sensitivity to yield changes
- Long-dated bonds dominate FX-relevant flows
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