Treasury yields rise as prices fall because the payments on an existing fixed-rate Treasury stay set, while its yield is calculated using the price a buyer pays. A lower purchase price for the same scheduled payments means a higher yield; a higher price means a lower yield.
How a Treasury’s coupon and yield differ
A Treasury note or bond is a series of scheduled cash flows: interest payments every six months and repayment of face value at maturity, under the security’s terms. The coupon, also called the interest rate, is applied to face value. It does not change just because the Treasury’s market price changes. TreasuryDirect explains Treasury pricing and interest payments.
Yield to maturity is an annualized return measure based on the price paid and the security’s scheduled payments, assuming the buyer holds it to maturity and the calculation’s assumptions apply. It is not the same as the coupon rate. TreasuryDirect’s publication on investing directly with the U.S. Treasury defines these terms.
Why the price and yield move in opposite directions
Buyers compare a Treasury’s remaining payments with the return available on similar securities. If market yields rise, a new buyer may not find an older Treasury with a lower coupon attractive at its former price. Its market price generally has to fall so that the scheduled payments offer a competitive yield to that buyer. If the market price rises instead, those same payments represent a smaller return relative to the amount paid, so yield to maturity falls.
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For notes and bonds, TreasuryDirect’s rule of thumb is that a yield to maturity above the interest rate set at auction corresponds to a price below par (face value); a yield equal to that rate corresponds to par; and a lower yield corresponds to a price above par. This comparison does not mean the coupon itself changes when the market price moves. The SEC describes the general relationship this way: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.” The SEC’s fixed-income investor bulletin explains the principle.
A simplified example from the SEC
The SEC’s June 26, 2013 investor bulletin illustrates the relationship with a $1,000 face-value, 10-year Treasury carrying a 3% coupon. After one year, with nine years remaining, it shows these outcomes:
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| Market-rate scenario in the SEC example | Illustrative price | Illustrative yield to maturity |
|---|---|---|
| Market rates fall from 3% to 2% | $1,082 | 2% |
| Market rates rise from 3% to 4% | $925 | 4% |
These are educational figures from the SEC’s 2013 example, not current market quotes or forecasts. They show that when market rates rise, the price of the older Treasury falls, bringing its yield into line with the higher return available to buyers.
Why some Treasuries are more sensitive to rate changes
Prices do not respond equally across securities. When comparing otherwise similar bonds, longer maturities and lower coupons generally mean greater sensitivity to interest-rate changes. A longer-maturity bond has more of its scheduled payments further in the future, so a change in the return buyers require can have a larger effect on what those payments are worth today. The SEC bulletin discusses maturity and coupon sensitivity.
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The actual price change depends on the security’s cash flows and the size and pattern of market yield changes. The inverse relationship is a general rule for fixed cash flows, not a complete explanation of every day’s price movement; other market factors can also matter.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What a falling price means for an investor
If an owner sells before maturity, the amount received depends on the prevailing market price, so a price decline can result in a loss relative to the purchase price. If the owner holds the security to maturity, the SEC says the holder receives the stated interest and face value, subject to the security’s terms. A Treasury’s backing concerns payment of interest and principal under those terms; it does not eliminate the risk that its market price will change before maturity. See the SEC’s discussion of fixed-rate bond risks.
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