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If Bonds confuse you, read this (Bonds 101):
Generally, bond prices are inversely related to bond yields, however, the relationship is more complex when there is an inverted yield curve (where the yield on short-term bonds is higher than the yield on long-term bonds).
Bond prices can be higher or lower than their face value, depending on the demand for the bond:
1) When interest rates rise, bond prices fall. This is because investors can get a higher yield on new bonds, so they are willing to pay less for existing bonds.
2) When interest rates fall, bond prices rise. This is because investors can get a lower yield on new bonds, so they are willing to pay more for existing bonds.
3) HOWEVER, when there is an inverted yield curve, the relationship between bond yields and bond prices is more complex. This is because investors are not only looking at interest rates but also at the outlook for the economy. When investors are expecting a recession, they will be willing to pay more for bonds, even if interest rates are rising.
β’ For short-term bonds, bond yields & bond prices follow their typical inverse relationship
β’ For long-term bonds, the relationship is more complex because other factors like future economic expectations can influence demand, and therefore bond prices
Thatβs confusing, here it is in an easier manner to digest: Imagine bonds are like toys you can buy from the store. The price of the toy can go up or down based on how much other kids want it. Now, imagine if the store changes the rules and sometimes when they get new toys, the old ones become cheaper. That's a bit like how bonds work β when new bonds (toys) with higher interest rates come out, the old ones might become cheaper. But sometimes, when people think the economy might not be doing well, they might still want the old toys even if they are more expensive. It's like a little game with toys and rules!
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