The relationship between interest rates and bonds is inverse. The higher the interest rate, the lower the bond price. The market interest rate and the market price of bonds have an inverse relationship. When interest rates rise, people have better expectations for the future and expect higher interest income, thus

Investment in short-term bonds is more favored, that is, commercial banks will receive more investment and more income.

On the other hand, long-term bonds, as well as industries based on long-term investment, such as insurance and funds, will receive less investment, which is bad news.

On the other hand, when interest rates rise to a certain level and the money supply cannot meet the needs of social development, the central bank will expand monetary policy and increase the money supply, thereby lowering interest rates.

At this time, rational investors will prefer long-term investments, such as long-term bonds, funds, and insurance industries.

Then, investment in short-term bonds will decrease, commercial banks will receive less investment, and profits will also decline.

Value determines price!

The value of a bond is the coupon rate (and principal) of the bond.

Since the bond market is continuous (countries and companies issue a large number of bonds in the market every year), investors can think that they can buy government bonds at any time. Based on the above situation, investors mainly consider the current situation when choosing bonds.

Whether the actual yield of the bond is in line with the value recognized by the market.

For example: The country has recently raised interest rates. Since the interest rates of previously issued (fixed interest) bonds will not be adjusted, in order for the market to recognize the trading price of a previously issued bond type, the bond can only adjust its yield (that is, the trading price changes).

) to adapt to the market’s value positioning.

(For example: the seven-year treasury bonds issued 2 years ago and the five-year treasury bonds issued that year have basically the same maturity date, and when they mature, the country pays the bond principal according to the face value. Since the seven-year treasury bonds issued 2 years ago

The coupon rate of the 1-year Treasury bond is low, so it can only make up for its actual yield through price decline, so that the actual return rate obtained by new investors buying these two varieties is basically the same).

Conclusion: When interest rates rise, the price of general fixed-rate bonds will fall significantly.

Of course, there are exceptions: floating-rate bonds. Since the interest rate of bonds changes with market changes, floating-rate bonds will not necessarily fall when interest rates rise.

Another example: if a corporate bond issued by a company goes bankrupt, the value of the bond will become "zero", regardless of whether the market cuts interest rates at this time.

The price of a bond is determined by three main variables: (1) The period value of the bond, which can be calculated based on the face amount, coupon rate and term; (2) The repayment period of the bond, from the bond issuance date or trading date to the bond maturity date

(3) The market rate of return, or market interest rate, should be the market interest rate of other financial assets with the same risk as the bond.

The trading price of bonds and market interest rates move in opposite directions. If market interest rates rise, bond prices will fall; conversely, if market interest rates fall, bond prices will rise.

Before explaining the relationship between the two, we need to understand how investors profit from bond investments.

For example, when an investor purchases a 10-year U.S. government bond, he or she is lending money to the U.S. government for 10 years.

In the next 10 years, the U.S. government will regularly pay interest to investors based on the coupon rate, and will repay the par value when the last interest payment is made.

When bond investors hold the bond until maturity, they can receive regular interest during the period and receive face value in cash at maturity.

If investors sell the bond before it matures, they can make a profit based on the current bond price (if the price rises).

Bond prices are primarily affected by market supply and demand.

Generally speaking, when interest rate expectations fall, bond prices rise because more investors choose to use cash on hand to purchase bonds to receive a fixed coupon rate.

In this case, investors can earn interest and profit.

Therefore, when investors expect the mid- to long-term trend of interest rates to decline, they may consider increasing their investment in bond funds.

Generally speaking, the interaction between the speed of economic development and market interest rates is as follows: If the U.S. economy grows rapidly, market interest rates will rise, which can cool down the brokerage; If the U.S. economic growth is stable, current interest rates will be maintained; If the U.S. economic growth slows down

If there is a recession, market interest rates will decrease, which can stimulate investment and develop the economy.

In addition, trends in medium- and long-term bond yields can often reflect market expectations for interest rate trends.

When the bond interest rate is lower than the current interest rate, it reflects that the bond market does not expect interest rates to rise, and may even fall.

Based on historical experience, bond interest rates will move one step ahead of the federal funds rate.

For example, in mid-2000, bond yields were the first to fall, but the federal funds rate only began to fall in January 2001. In mid-2003, bond yields rose, and the federal funds rate gradually increased in mid-2004.

When bond yields begin to fall as they did in 2000, the federal funds rate is likely to follow.

Bond Dictionary Bond price refers to the transaction price of bonds purchased and sold in the market.

Coupon rate refers to the interest paid to investors on a regular basis.