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Treasury yields and the market prices of existing fixed-rate Treasury notes and bonds move in opposite directions because the securities’ promised cash payments do not change after issuance. When comparable market yields rise, an older note with a lower fixed coupon must sell for less to give a new buyer a competitive return. When yields fall, that same stream of fixed payments is more valuable, so buyers can bid the price above its face value.
The key is to separate three terms: the coupon or interest rate set when the security is issued, the yield to maturity earned by someone who buys at today’s price and holds to maturity, and the market price itself. TreasuryDirect summarizes the relationship this way: when yield to maturity is greater than the note or bond’s interest rate, price is below par; when the two are equal, price is par; and when yield is lower, price is above par.
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The one-sentence explanation
A fixed-rate Treasury promises the same coupon payments and repayment of face value regardless of what new securities are yielding. Because a buyer can choose between that existing security and newly issued Treasuries, its price has to adjust whenever market yields change. A lower price raises the return available from the old payments; a higher price lowers that return. This repricing creates the inverse relationship.
The relationship applies to marketable, fixed-rate Treasury notes and bonds trading after issuance. It does not mean that every Treasury product responds in exactly the same way, or that a yield change predicts a particular number of dollars in price movement.
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Coupon rate, yield to maturity and price are different
Confusing the coupon with the yield is the source of most misunderstandings. TreasuryDirect defines the yield to maturity as “the annual rate of return on the security.” That return measure depends on both the promised cash flows and the price paid. The interest rate, by contrast, is the rate applied to the security’s face value to calculate its scheduled payments.
| Term | What it means | Does it change after issuance? |
|---|---|---|
| Coupon or interest rate | The fixed percentage of face value used to calculate each interest payment. | No for a fixed-rate note or bond. |
| Coupon payment | The cash amount paid to the holder, normally every six months for a Treasury note. | No, unless the security is not a fixed-rate product. |
| Face value (par) | The amount scheduled to be repaid at maturity, often used as the reference for the coupon calculation. | The contractual amount is fixed. |
| Market price | What buyers and sellers agree to pay for the remaining cash flows in the secondary market. | Yes, it changes with market conditions. |
| Yield to maturity (YTM) | An annualized return measure for buying at the current price and holding until maturity, incorporating coupons and the maturity payment. | It changes when the market price or relevant rates change. |
TreasuryDirect’s glossary describes the interest-rate concept for marketable securities, while its pricing explanation sets out how price and yield to maturity relate.
How the repricing works, step by step
1. The Treasury fixes the promised cash flows
At auction, a fixed-rate note or bond receives an interest rate. The security then makes its scheduled coupon payments and returns its face value at maturity. Treasury notes pay interest every six months, according to TreasuryDirect’s Treasury Notes terms. The holder does not receive a larger coupon merely because market rates later rise.
2. Comparable new investments establish the opportunity
Suppose newly available Treasuries with similar remaining maturities offer higher yields. A buyer comparing them with an older security will not normally pay the old security’s original price if its fixed coupons are smaller. The old security must offer a compensating discount.
3. The discount changes the buyer’s return
Buying below face value gives the new owner two sources of return: the fixed coupons and the difference between the discounted purchase price and the face value repaid at maturity. That combination raises the yield to maturity. The lower price does not change the coupon check; it changes the return relative to the amount invested.
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4. Falling market yields reverse the incentive
If comparable yields fall, the older security’s fixed coupons may be more generous than what a new buyer can obtain elsewhere. Demand for the old security can push its price above face value. The buyer then pays a premium, which lowers the return to maturity enough to align it with the lower market yield.
5. The market converges on a competitive yield
Prices continue to adjust as buyers and sellers compare the remaining coupons, the maturity payment, time left, and prevailing yields. The resulting price is not selected by the coupon alone; it reflects the value of all remaining cash flows at current market rates.
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The official shorthand is useful when reading a quote:
- If yield to maturity is greater than the note or bond’s interest rate, the price is below par.
- If yield to maturity is equal to the interest rate, the price is at par.
- If yield to maturity is lower than the interest rate, the price is above par.
“Par” means the security’s face value. A price below par is a discount; a price above par is a premium. This rule describes the direction for a fixed-coupon security, not a promise that every quote will move by the same amount when yields change.
Hypothetical example: a $1,000 note with a 3% coupon
Consider a hypothetical fixed-rate Treasury note with a $1,000 face value and a 3% annual coupon. The scheduled annual interest is $30, normally paid as two $15 installments under standard Treasury note terms. These figures illustrate the mechanism; they are not a current quote or a forecast.
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| Market situation | What remains fixed | Likely price relationship | Why |
|---|---|---|---|
| Comparable yields rise above 3% | $30 per year in coupons and $1,000 at maturity | Below $1,000 | A discount gives the buyer additional return potential alongside the $30 coupons. |
| Comparable yields equal 3% | The same coupons and maturity payment | Approximately $1,000 | The coupon rate and yield to maturity align at par, ignoring transaction details. |
| Comparable yields fall below 3% | The same coupons and maturity payment | Above $1,000 | A premium reduces the buyer’s return toward the lower market yield while preserving the attractive coupons. |
Notice what does not happen: the note does not start paying a different coupon when yields move. Only the price at which someone can buy or sell the remaining cash flows changes.
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The inverse direction is general, but the size of a price change depends on the security’s remaining cash-flow schedule. A note or bond with more time before maturity has more future payments whose value must be repriced. A rate change can therefore have a larger effect on its market price than on an otherwise similar security nearing maturity. The exact response also depends on the coupon and the market’s required yield.
This is why two fixed-rate Treasuries can both fall when yields rise yet fall by different percentages. Comparing only their coupon rates leaves out the timing of the payments and the maturity repayment.
Holding to maturity versus selling early
If you hold through maturity
A holder who keeps a fixed-rate Treasury note to maturity receives the scheduled interest payments and the face value under the Treasury’s terms. An interim quotation below the purchase price does not rewrite the coupon or automatically reduce the maturity payment. The market value can fluctuate on paper while the contractual cash flows remain unchanged.
If you sell before maturity
Treasury notes are marketable: they can be held to maturity or sold before then. TreasuryDirect’s FAQ explains that marketable Treasuries trade in a secondary market at prevailing prices. If yields have risen, the sale price may be below what you paid; if yields have fallen, it may be above it. The seller receives the market price available at that time, not necessarily face value.
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A secondary-market transaction can also involve accrued interest. TreasuryDirect discusses purchasing channels and accrued interest in Buying a Treasury Marketable Security. Accrued-interest adjustments account for the portion of a coupon period that has elapsed; they do not change the underlying inverse relationship between a fixed coupon and the security’s market yield.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to read a Treasury quote
When examining an existing note or bond, use all of the following fields together:
- Coupon or interest rate: identify the fixed percentage applied to face value.
- Yield to maturity: treat it as the annualized return measure based on the current purchase price and holding assumption, not as the coupon payment.
- Price relative to par: below 100 (or below face value) indicates a discount; above 100 indicates a premium.
- Remaining maturity: record how long until the face value is due, because timing affects sensitivity to rate changes.
- Sale horizon: decide whether the investment may be sold before maturity. The price risk matters most when an exit before maturity is possible or likely.
If the quoted yield is higher than the coupon, a discount should generally appear. If the quoted yield is lower, a premium should generally appear. If the displayed fields seem inconsistent, check whether the quote uses a different yield convention, includes accrued interest, or refers to a different maturity date.
Why the rule does not apply identically to every Treasury
The fixed-coupon explanation is deliberately specific. TreasuryDirect’s pricing page covers several products with different cash-flow rules:
- Treasury bills are sold at a discount and mature in one year or less. They do not make the same periodic coupon payments as notes and bonds, so the illustration above is less direct.
- Treasury Inflation-Protected Securities (TIPS) adjust principal for inflation or deflation. Their interest calculations can therefore change with the inflation adjustment rather than remaining a simple fixed-coupon stream on an unchanging principal.
- Floating-rate notes have an interest rate that resets against an index. Their payments are not fixed in the same way as a conventional fixed-rate note.
These products still have prices and yields, but their cash flows require product-specific analysis. Do not apply the $1,000, 3% example mechanically to them. See TreasuryDirect’s Understanding Pricing and Interest Rates for the product distinctions.
Common mistakes and the correction for each
“The yield is the interest payment.”
Correction: The coupon determines the scheduled payment on face value. Yield to maturity measures the annualized return relative to the price paid and the value received at maturity.
“A price drop means the Treasury stopped paying interest.”
Correction: For a fixed-rate note, the contractual coupon remains the same. A price drop is the market’s way of increasing the prospective return for a new buyer.
“Every Treasury falls by the same amount when yields rise.”
Correction: Direction and magnitude are different questions. Remaining maturity, coupon, payment timing and product design affect the amount of repricing.
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Correction: A discount is a market price below face value. An investor who buys at that price and holds to maturity may receive coupons plus the scheduled face-value repayment, while an investor who sells early realizes whatever price the market then offers.
“The inverse rule guarantees a profit.”
Correction: It describes how price and yield are related for the security’s remaining cash flows. It does not guarantee a particular trading result, and selling before maturity exposes the holder to the prevailing market price.
A practical comparison framework
When choosing between two fixed-rate Treasury notes or bonds, compare the following rather than selecting the higher coupon by itself:
| Comparison axis | Question to ask | Why it matters |
|---|---|---|
| Coupon | How much fixed interest does each security pay on face value? | It determines the scheduled cash payments. |
| Yield to maturity | What annualized return does the current price imply if held to maturity? | It incorporates the price paid, coupons and maturity value. |
| Price versus par | Is each security at a discount, par or a premium? | The difference between purchase price and face value affects the return. |
| Remaining maturity | When is the face value due? | Payment timing influences sensitivity to yield changes. |
| Need to sell | Could the investment be sold before maturity? | Early sale converts the interim market price into a realized result. |
This is an analytical checklist, not a personalized investment recommendation. Tax treatment, transaction costs, liquidity and an investor’s objectives can also affect a decision, but none changes the basic reason fixed-coupon prices and yields move in opposite directions.
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Bottom line
For an existing fixed-rate Treasury note or bond, the coupons and maturity payment are fixed while the market’s required return changes. Higher yields make the old cash flows less attractive at the old price, so the price falls; lower yields make them more attractive, so the price rises. TreasuryDirect’s par rule—yield above the coupon means a discount, equality means par, and yield below the coupon means a premium—is the quickest way to check that relationship.
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