The question

If a government bond promises a fixed stream of payments, why does its market price keep changing?

The answer is that new bonds and old bonds compete. When investors can earn a higher yield on comparable new securities, a lower-coupon existing bond generally has to become cheaper to offer a competitive return.

A one-year example

Imagine a bond with a face value of $1,000 that will pay $50 in interest and return the full $1,000 principal in one year.

If the market requires a 5% return, the present value of its $1,050 future payment is $1,000.

But if the required market return rises to 6%, that same fixed $1,050 payment is worth only approximately $990.57 today:

Price = $1,050 ÷ 1.06 ≈ $990.57

Nothing about the promised payment changed. The price changed because the return investors require changed.

This is a hypothetical illustration, not a quotation for a real Treasury security.

The longer the bond, the bigger the sensitivity

A bond’s duration helps describe how sensitive its price is to yield changes. Longer-maturity bonds often have greater interest-rate sensitivity because investors wait longer to receive more of their cash flows.

This is why a 10-year or 30-year Treasury can move noticeably even on days when the central bank makes no immediate change to its overnight policy rate.

The Fed and the yield curve

The Federal Reserve directly influences very short-term policy rates. Longer-term yields also reflect expectations for future short-term rates, inflation, term premiums, and supply-and-demand conditions in the bond market.

The important distinction is:

  • Policy rate: A short-term rate set by the central bank.
  • Bond yield: The return implied by the current price and cash flows of a specific bond.
  • Yield curve: A picture of yields at different maturities.

A higher 10-year yield does not necessarily mean that the Fed just raised rates. Investors may instead have revised expectations for growth, inflation, future deficits, or the compensation demanded for holding long-term bonds.

What to watch

For fixed-income research, compare changes in nominal yields with inflation expectations and real yields where available. Separate actual policy decisions from market-implied future decisions, and pay attention to whether the move is concentrated at the short or long end of the curve.

Research principle: A bond yield is both a return measure and a signal about what investors expect and demand.