Bond Yields vs. Stock Prices

by Geri Terzo

Bond yields and stock prices are both part of the investment process. A bond's yield is the return that an investor earns on a fixed-income investment. A stock price determines what an investor must pay to become an equity shareholder. Both a bond's yield and its price are used to determine the income that the investment will distribute over time. Stock prices change based on supply and demand in the markets and an investor's profit is determined by market movement.

Rising Rates

The relationship between bond prices and bond yields is rather transparent. When bond prices fall, the interest rate, or yield, on that security rises. This makes it more expensive for bond issuers to borrow money in the debt markets. According to the Knowledge at Wharton website, rising interest rates in the bond market are likely to have a dampening effect on stock prices. In an environment where rates are rising and stock prices are suppressed, investors can earn higher returns in the bond market in comparison with stocks.

Features

A bond's yield is the return that the investment generates over a year. It is based on the interest rate and price of the debt instrument. If the interest rate is variable, a bond's yield can change significantly from the original time of an investment. The higher the yield on a bond, the riskier the investment is considered. Safer bonds, such as government Treasuries, pose a small risk of default and subsequently investors earn a more modest yield.

Volatility

Both stock prices and bond yields can exhibit volatility. Extreme market swings are more common in the equity markets where stocks trade, but the bond market is not immune. Inflation is a trigger for volatility in the bond markets, according to a 2011 article on the CNN Money website. Inflation appeared to be looming in January of that year, and in the article Bel Air Investment Advisors analyst Kenneth Naehu warned that erratic trading activity in the bond market could continue.

Correlation

Bonds and stocks are typically non-correlated asset classes. When stock prices are suffering, for instance, investors might flee those investments for the stability that bonds tend to offer. Following the financial meltdown of 2008, investors eventually started returning to the stock market, according to a 2010 article on "The Wall Street Journal" website. Subsequent stock price volatility, however, caused some individual investors to sell stocks in favor of the more stable yields that bonds had to offer.

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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