Bond Yields 101

What this article does

If you've followed any financial news in the last few years, you've heard "Treasury yields rose" or "the 10-year hit 5%" thrown around like everyone already understands what it means. Most people don't. Half the time the explanations on financial Twitter are actively wrong.

This article fixes that. By the end, you will:

• Understand what a bond yield actually is, in plain terms
• Know why bond prices and yields move in opposite directions — and never mix them up again
• Recognise why the 10-year Treasury yield is the most-watched number in macro
• Understand what duration is and why it explains 2022's bond market disaster
• Know the difference between nominal and real yields — and why TIPS exist
• Be able to read what bond yields are saying about the economy

This is article 2 of 9 in the Lighthouse foundation series. The first article on credit spreads only fully makes sense once you understand yields on their own. Get this one right and the rest of the platform clicks into place.

The lending-money analogy

Imagine your mate Jamie asks to borrow £1,000 from you for a year, and offers to pay you back £1,050.

The £50 extra is your interest. As a percentage of what you lent, that's 5%. That 5% is your yield — the return you earn for lending Jamie the money instead of keeping it in your account.

Now imagine the deal is already in place. Jamie has signed a written promise to pay you £1,050 in a year. Then a different friend, Sam, offers to buy that promise off you today for £1,025. If you accept, Sam gets the £1,050 from Jamie at the end of the year and pockets £25.

What's Sam's yield? £25 on £1,025 invested = roughly 2.4%. Sam paid more for the same future payment, so Sam earns less.

This is exactly how bonds work. A bond is a written promise to pay future amounts (called coupons and the par value at the end). The market price of that promise moves up and down. When someone pays more, they earn less. When someone pays less, they earn more. The COVID-19 market shock in March 2020 caused HY OAS to widen rapidly from below 4% in mid-February 2020 to above 10% by late March 2020.^[1]

A bond's yield is the return you actually earn if you buy the bond at today's price and hold it to maturity, collecting all the coupons along the way.

The inverse relationship — the most-confused fact in finance

Here's the thing every beginner gets wrong, and even financial journalists sometimes muddle:

Bond prices and bond yields move in opposite directions. When prices rise, yields fall. When prices fall, yields rise.

It's not a quirk. It's not a market convention. It's literally the same thing said two different ways. Inverse relationship.

Concrete example. Suppose a 10-year US Treasury was issued at par (£1,000) with a 4% coupon — meaning it pays £40 per year for 10 years, then £1,000 at the end. If you buy it at issuance, your yield is 4%.

Now imagine three months later, interest rates have risen. New 10-year Treasuries are being issued with a 5% coupon — they pay £50 a year. Why would anyone buy your old 4% bond when they can get a new 5% bond for the same £1,000?

They wouldn't — unless your old bond's price falls. If your bond's price drops to about £920, the buyer pays less but still gets the £40 annual coupon and £1,000 at maturity. Run the maths and the buyer earns roughly 5% as well. Different mechanism, same yield.

That's the inverse relationship in action. Treasury prices and yields are quoted separately. A bond trading at a price of 95 with a 4% coupon yields more than 4% because the buyer pays less than face value but still receives the full coupon. A bond at 105 yields less than 4% for the opposite reason.^[2]

When you read "Treasury yields rose today", that means the same thing as "Treasury prices fell today". It's not extra information. The number can move 50 basis points and that's one move, not two.

This trips up beginners constantly. Don't be one of them.

What basis points mean

Yields are quoted in basis points when the changes are small. One basis point equals 0.01 percentage points. Treasury yields move in basis points — one basis point equals 0.01 percentage points. A move from 4.30% to 4.50% is 'a 20 basis point move' or '20bp'.^[3]

So a yield going from 4.30% to 4.50% is "a 20 basis point move" or "20bp". A yield going from 4.30% to 5.30% is "100 basis points" or "1 percentage point". You'll see "bps" used in headlines and trader speak — same thing.

Why does this matter? Because in the bond market, 20 basis points is a lot. The 10-year Treasury moving from 4.30% to 4.50% in a single day would make front-page financial news. To equity investors used to stocks moving 2-3% in a day, bond moves can look tiny — but the underlying bond market is far larger and far less volatile, so a small move in yield is a big deal.

The Treasury maturity ladder

The US government issues debt across a wide range of maturities, each with its own yield. Federal Reserve emergency announcements on 23 March 2020 (including unlimited QE and corporate credit facilities) marked the turning point for credit spreads during the COVID episode. HY OAS began compressing within days.^[4]

The shortest are bills — anything 12 months or less. 4-week, 8-week, 13-week, 26-week, and 52-week. These are issued at a discount (you pay £980, get back £1,000) rather than paying coupons.

In the middle are notes — 2, 3, 5, 7, and 10-year maturities. These pay coupons twice a year, then the principal at maturity.

At the long end are bonds — 20-year and 30-year maturities. Same structure as notes, just longer.

Each one has its own yield, and together they form what's called the yield curve — a chart of yields across all maturities. (We cover the yield curve in detail in article 3.)

For now, the only one you really need to remember is the 10-year. The 2022 inflation/rate-hike cycle pushed HY OAS to a local peak in the second half of 2022, but the widening was modest by historical standards (peaking around 6%, well below recession or crisis thresholds).^[5]

Why the 10-year is the most-watched number in macro

The 10-year Treasury yield isn't the most-watched bond yield because it's special. It's the most-watched because almost everything else is priced off it.

Mortgage rates — the 30-year fixed mortgage rate in the US is roughly the 10-year Treasury yield plus about 2-3%. When the 10-year moves, mortgage rates follow.

Corporate borrowing — investment-grade companies borrow at a spread over the 10-year. When the 10-year rises, corporate borrowing costs rise too.

Equity valuations — the standard discounted cash flow model values stocks based on their future cash flows discounted by the 10-year yield. When the 10-year rises, stock valuations face downward pressure (everything else being equal).

This is why a single number — currently around 4.4% — moves trillions of dollars of asset prices when it shifts. The 10-year isn't just a Treasury yield. It's the foundation of how the financial system prices the future.

Duration — why a 1% rate move can wipe out years of returns

Now we get to the concept that most retail investors don't understand and that explains some of the wildest moments in market history.

Duration is a measure of how much a bond's price changes when yields change. It's expressed in years, but it's not the same as maturity — it's a more refined measure that accounts for how the bond's coupons are spaced over time.

Rule of thumb: a bond with a duration of 7 years will lose roughly 7% of its price if yields rise by 1 percentage point — and gain roughly 7% if yields fall by 1 point.

The current 10-year Treasury has a duration of around 8.5 years. The 1998 LTCM (Long-Term Capital Management) collapse caused a sharp spike in credit spreads in August-October 1998, despite no formal US recession at the time.^[6]

Think of duration as how heavy the bag is. A short-duration bond is a small handbag — easy to carry, doesn't shift much when you stumble. A long-duration bond is a heavy backpack — when you trip, the weight makes the fall much harder.

Now imagine you're carrying a 30-year zero-coupon Treasury — basically a bond that pays nothing for 30 years and then pays you a lump sum. Its duration is roughly 30 years. If yields rise by 1 percentage point, the bond loses about 30% of its value.

That's not theoretical. It's what happened in 2022.

What 2022 actually was

Most retail investors think of 2022 as "the year stocks fell." The S&P 500 dropped about 19%. That's bad, but in equity terms, not historic.

Here's the thing nobody talks about: the bond market had its worst year on record. Howard Marks's December 2022 memo 'Sea Change' identified a regime shift in markets, arguing that the four-decade era of falling and ultra-low rates had ended and that credit was becoming structurally more attractive than equity.^[7]

The Bloomberg US Aggregate Bond Index — the benchmark every "diversified" portfolio uses — lost 13% in 2022. That was its worst calendar year since the index began in 1976. Long-duration Treasury funds lost over 30%.

Why? Because the Federal Reserve raised the federal funds rate from 0-0.25% at the start of the year to 4.25-4.50% by year end. That's a 425 basis point move in 12 months, the fastest tightening cycle in modern history. Howard Marks's December 2022 memo 'Sea Change' identified a regime shift in markets, arguing that the four-decade era of falling and ultra-low rates had ended and that credit was becoming structurally more attractive than equity.^[7]

Long-duration bonds got crushed. People who'd been told for decades that "bonds are safe" discovered that "safe" depends entirely on duration and yield environment. A 60/40 portfolio (60% stocks, 40% bonds) had its worst year since 1937.

The lesson: bonds aren't risk-free. They're default-risk-free (for Treasuries) but extremely sensitive to interest rates. Duration is the dial that determines how much that sensitivity bites.

Real yields — the number that actually matters

There's one more concept that turns yields from numbers on a screen into something you can actually use.

When you see "the 10-year is at 4.4%", that's the nominal yield — the headline number. But the dollar (or pound) you get back has lost some of its purchasing power to inflation along the way.

Real yield = nominal yield minus expected inflation. Real yield is the nominal yield minus expected inflation — what a bond actually returns after inflation is accounted for. The Treasury issues TIPS (Treasury Inflation-Protected Securities) which pay an explicit real yield because their principal adjusts with CPI.^[8]

If the nominal 10-year is 4.4% and expected inflation over the next decade is 2.5%, your real yield is roughly 1.9%. That's what you actually earn, in terms of what your money will buy a decade from now.

The Treasury issues a special class of bonds called TIPS (Treasury Inflation-Protected Securities) where the principal adjusts with CPI. The yield on a 10-year TIPS is the market's direct estimate of the real 10-year yield.

Why does this matter? Because the same nominal yield can mean wildly different things depending on inflation. A 5% nominal yield with 2% inflation = 3% real return. A 5% nominal yield with 8% inflation = -3% real return — you're losing purchasing power. Same headline number, opposite meaning.

When economists and market commentators talk about whether monetary policy is "tight" or "loose," they're usually talking about real rates, not nominal. Real rates are the truth-telling layer.

How the Fed actually influences yields

The Federal Reserve sets the federal funds rate — the overnight rate at which banks lend reserves to each other. That's the only rate the Fed directly controls.

But the Fed's influence transmits through the yield curve in a specific way: The Lighthouse local database contains daily HY OAS observations from 30 April 2023 to present, totalling 786 daily observations as of 28 April 2026.^[9]

Short-term yields (T-bills, 2-year notes) move closely with the federal funds rate. When the Fed hikes, short-term yields hike with it almost mechanically.

Long-term yields (10-year, 30-year) move based on the market's expectations of future short rates plus a "term premium" — extra compensation for the risk of holding bonds for a long time.

This is why the yield curve sometimes inverts (short rates higher than long rates) — when the Fed has hiked aggressively but markets expect the Fed to cut in the future. We cover this in detail in article 3.

For now, the takeaway is: the Fed sets one rate, the market sets the rest. A Fed hike doesn't automatically push 10-year yields up by the same amount. Sometimes the 10-year barely moves on a Fed decision. Sometimes it moves more than expected. The transmission depends entirely on what the market believes about future policy.

When yields rise vs when yields fall

You can't trade markets effectively without knowing what causes yields to move. The two main drivers: As of 28 April 2026, the HY OAS sits at 2.85%, well within the compressed regime range and near the lower end of the spread's three-year window.^[10]

Yields rise when:

• Economic growth expectations strengthen (more demand for borrowing, higher real returns required)
• Inflation expectations rise (lenders demand compensation for the eroding purchasing power)
• The Fed hikes rates (or signals it will)
• Treasury issues more debt than expected (supply glut)

Yields fall when:

• Recession fears rise (investors flee to the safety of Treasuries — "flight to quality")
• Inflation expectations drop
• The Fed cuts rates (or signals it will)
• Foreign demand for US debt increases (e.g. central banks buying Treasuries)

This is why yields contain so much macro information — they reflect the market's collective bet on future growth, inflation, and policy. A sharp move in yields almost always means someone with money is changing their view about the future.

The Lighthouse takeaway

If you remember nothing else from this article, remember:

Bond yields and bond prices move in opposite directions. The 10-year Treasury yield is the most-watched number in macro because almost everything else prices off it. Duration measures how sensitive a bond's price is to yield changes — and it's why "safe" bonds can lose 30% in a year. Real yields (nominal minus inflation) are the truth-telling layer. The Fed only directly controls overnight rates; the market sets longer yields based on expected future policy.

The Lighthouse dashboard tracks the 10-year, 2-year, and the yield curve directly. Other foundation articles will dig into each. For now, you've got the vocabulary to read what the bond market is saying.

The next time you see a headline like "Treasury yields jumped 15 basis points on stronger-than-expected jobs report," you'll know exactly what just happened: the bond market raised its bet on future growth and Fed tightness, prices fell, and the 10-year is now telling everyone — mortgages, equities, corporate bonds — to recalibrate.

That's worth more than most people who watch markets full-time understand.

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