Treasury yields rise when Treasury prices fall because the bond’s scheduled payments stay fixed while its market price changes. A buyer who pays less for the same future interest and principal payments gets a higher yield to maturity; a buyer who pays more gets a lower yield.
Why a Treasury’s price and yield move in opposite directions
A fixed-rate Treasury note or bond is a package of future cash flows: interest payments and repayment of face value at maturity. Treasury notes and bonds pay interest every six months. The coupon rate determines the interest payment as a percentage of face value; it does not change just because the bond’s market price changes. TreasuryDirect explains the payment and pricing structure.
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Yield to maturity is an annualized return measure calculated from the price paid and the security’s scheduled payments, assuming it is held to maturity and the calculation’s assumptions apply. When market yields rise, an older Treasury with a lower coupon is generally less attractive than newly available securities. Its price must usually fall so that a buyer paying the reduced price can earn a competitive yield from the remaining payments. When market yields fall, the reverse generally happens: the older bond’s fixed payments become more attractive, so its price can rise and its yield to maturity can fall.
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The SEC’s Office of Investor Education and Advocacy puts the principle this way: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.” This general relationship applies to fixed cash flows; day-to-day prices can also respond to other market factors. The SEC’s Investor Bulletin was published June 26, 2013.
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Coupon rate, current price and yield are different things
The coupon (also called the interest rate in TreasuryDirect’s pricing explanation) is set for the security and applies to face value. Yield to maturity reflects what an investor may earn based on the market price paid and the remaining scheduled payments. TreasuryDirect’s publication on investing directly with the U.S. Treasury defines coupon rate and yield to maturity; the SEC also explains general bond terms such as price, face value and yield to maturity in its corporate-bond overview.
For Treasury notes and bonds, TreasuryDirect gives this relationship between yield to maturity and the stated interest rate: when yield is above the interest rate set at auction, price is below par; when yield and interest rate are equal, price is at par; and when yield is below the interest rate, price is above par. “Par” means face value. This describes how yield and price relate; it does not mean a price change alters the coupon.
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An SEC example: the same Treasury under two market-rate scenarios
The SEC’s June 26, 2013 bulletin illustrates the arithmetic with a simplified $1,000 face-value, 10-year Treasury carrying a 3% coupon. After one year, the example has nine years remaining:
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1Clear out junk files and repair common Windows errors2Scan for outdated or missing drivers - takes under a minute3Repair Windows errors before they cause bigger problems| Illustrative market-rate scenario | Price shown by the SEC | Yield to maturity shown |
|---|---|---|
| Rates fall from 3% to 2% | $1,082 | 2% |
| Rates rise from 3% to 4% | $925 | 4% |
These are the SEC’s educational figures, not current market quotes, forecasts or a promise of what any particular Treasury will do. They show the direction of the relationship: a higher price for the fixed payments corresponds to a lower yield, and a lower price corresponds to a higher yield. See the SEC’s example and explanation.
Why different Treasuries react by different amounts
The inverse relationship does not mean every Treasury’s price moves by the same amount when yields change. The SEC says that, comparing otherwise similar bonds, longer maturities and lower coupons generally mean greater interest-rate sensitivity. A bond with more distant cash flows or a smaller coupon has more value dependent on payments further in the future, so a change in the return investors demand can have a larger effect on its price. Actual price changes depend on the security’s cash flows and on the size and pattern of yield changes. The SEC discusses maturity and coupon sensitivity.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What a price drop means if you own the Treasury
A market-price decline matters to the amount an owner receives if they sell before maturity: the sale price will reflect prevailing market conditions. If the owner holds the Treasury to maturity, the SEC says the holder receives the stated interest and face value, subject to the security’s terms. A Treasury’s backing by the U.S. government does not remove this market-price risk; it concerns payment of interest and principal under the security’s terms. The SEC’s bulletin explains both the price risk and holding-to-maturity distinction.
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