The financial market has experienced an unusually insane week after Donald Trump announced his rescue plan for America on Liberation Day, imposing a **reciprocal tariff policy** on countries all around the world. More interesting things happen in the Treasury Bonds market with high volatility and spark negative reactions either in newspapers or in online media. This passage does not serve as investment advice, but still aims to explain why U.S. Treasury Bonds are investable even under this unpredictable Trump administration.
Treasury Bonds are issued by nations with the aim of financing and covering the deficit of the government’s fiscal position, which exists in most countries worldwide. Some factors attached to such bonds are as follows:
For example, if a bond has a face value of $1,000 with an annual coupon rate of 4%, valid for ten years. That means, for this single bond, the lender should receive $1,000×4%=$40 every year and 10×$40=$400 for the total duration of ten years. At the maturity date, this $1,000 should be repaid by the issuer.
It is worth noting that the overall return of a single bond is fixed during its issuance.
Instead of the coupon rate, players in the secondary market care more about the Yield of a bond, which represents the actual return of a bond concerning opportunity cost. Current Yield is calculated as:
$$ \text{Current Yield} = \frac{\text{Coupon Payment}}{\text{Current Market Price}} $$
Following the previous example, the annual coupon payment would be $1,000×4%=$40. If the market price is below its face value of $1,000, say $922, then the current yield would be $40÷922≈4.34% > 4%. That is, the current yield and current market price vary in opposite directions.
Moreover, the most important and widely used metric in this market is Yield to Maturity (YTM), calculated as:
$$ P = \sum_{t=1}^{n} \frac{C}{(1 + r)^t} + \frac{F}{(1 + r)^n} $$
where P = Bond Price, C = Coupon Payment, F = Face Value, n = Years to Maturity and r = YTM.
By solving this equation, we get the r, YTM, from this discounted present value equation, similar to the intertemporal consumption model in microeconomics and the DCF model in accounting, where future values are brought into present terms to evaluate choices or investments. Without further mathematical proof, the statement that market price and yield move in opposite directions also holds for YTM.
YTM serves as a benchmark for trading, as it indicates the confirmed return if holding the bond until its maturity date, if no default or extreme case happens.
Takeaway: The Yield and Price of government bonds are inversely correlated.
Face value is fixed when a bond is first issued in the primary market, while market price fluctuates in the secondary market based on supply and demand.