Bonds & Interest Rates — 10-Year Yield & Inversions

What Is a Bond?

A bond is a loan you make to a government or corporation. In return, the issuer promises to pay you regular interest (coupon payments) and return your principal at maturity. Unlike stocks — which represent ownership — bonds represent debt.

5 Key Terms

• Face Value (Par) — the principal repaid at maturity, typically $1,000.
• Coupon — the annual interest rate paid on par. A 3% coupon on $1,000 = $30/year.
• Maturity — the date the issuer repays principal. Can be 2, 10, or 30 years away.
• Yield — the effective return if you buy at today's market price and hold to maturity.
• Duration — a measure of interest-rate sensitivity. Longer maturity = more price movement per rate change.

The Core Principle: Rates Up, Prices Down

When new bonds offer higher coupons, existing bonds paying lower rates become less attractive and must fall in price to compete. The rule is simple: interest rates rise → existing bond prices fall, and vice versa.

Why the 10-Year Treasury Yield Matters

The US 10-year yield is the closest thing markets have to a “risk-free rate.” When it rises, the discount rate applied to all future cash flows increases — which is why high-growth stocks (whose earnings are far in the future) tend to underperform during rate-hike cycles.

The 10-year yield is a critical input for valuation models, mortgage rates, and corporate borrowing costs. It is the single most-watched macro data point in US markets. See the CPI & Fed Guide for context.

Yield Curve & Inversions

The yield curve plots yields across maturities. Normally, longer maturities pay more. An inverted curve — where short-term rates exceed long-term rates — has historically preceded recessions, though the lag is unpredictable (sometimes 12–24 months).

An inversion is a warning signal, not a sell trigger. Liquidating your portfolio on every inversion would have kept you out of major bull market gains. Use it as context for position sizing, not as a timing tool.

Bond ETFs for Beginners

• AGG / BND — broad US bond market. A solid starting point for fixed-income exposure.
• SHY / SGOV / VGSH — short-term Treasuries. Low duration, less rate sensitivity, roughly cash-like.
• TLT / VGLT — long-duration Treasuries. Large price swings with rate moves. Not a “safe” short-term holding.
• HYG / JNK — high-yield (junk) bonds. Higher income, but correlates more with equities in downturns.

Role in a Portfolio

The classic 60/40 portfolio (60% stocks, 40% bonds) is not magic — it is a historical compromise between growth and volatility reduction. During equity sell-offs, high-quality bonds often (though not always) hold value or rise, cushioning the portfolio.