Treasury yields rise as prices fall because the payments on an existing fixed-rate Treasury stay scheduled, while its yield is calculated using the price a buyer pays. A lower purchase price for the same future payments means a higher return for the buyer; a higher price means a lower return.
What a Treasury bond pays—and what its yield measures
A Treasury note or bond is a set of future cash flows: stated interest payments every six months and repayment of face value at maturity. The coupon, also called the interest rate, is applied to face value; it does not change just because the security’s market price moves. TreasuryDirect explains the payment structure and pricing.
- Coupon rate: The stated rate applied to face value.
- Market price: What a buyer pays for the security, which can be below, equal to, or above face value.
- Yield to maturity: An annualized return measure based on the price paid and the scheduled payments, assuming the security is held to maturity and the calculation’s assumptions apply. TreasuryDirect’s publication defines the coupon rate and yield to maturity.
For a note or bond, TreasuryDirect’s pricing rule is straightforward: when yield to maturity is above the interest rate set at auction, the price is below par; when the two rates are equal, the price is at par; and when yield to maturity is below the interest rate, the price is above par. “Par” means face value.
Why prices and yields move in opposite directions
Buyers compare a Treasury’s scheduled payments with the return available on similar securities. If market yields rise, a previously issued Treasury with a lower coupon generally has to sell for less to offer a competitive return to a new buyer. The cash flows have not changed; the lower purchase price raises the yield implied by those cash flows.
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The reverse is also true. If a fixed-rate Treasury’s market price rises while its scheduled payments stay the same, a buyer pays more for the same cash flows, so the yield to maturity falls. The SEC’s Office of Investor Education and Advocacy describes this as a general principle: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.” The statement appears in its June 26, 2013 Investor Bulletin on fixed-income investments.
SEC example: how a price change affects yield
The SEC’s June 26, 2013 bulletin uses a simplified example of a $1,000 face-value, 10-year Treasury with a 3% coupon. After one year, with nine years remaining, it illustrates two possible market-rate changes:
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| Scenario in the SEC example | Illustrated price | Illustrated yield to maturity |
|---|---|---|
| Market rates fall from 3% to 2% | $1,082 | 2% |
| Market rates rise from 3% to 4% | $925 | 4% |
These are the SEC’s educational figures, not current Treasury quotes, forecasts, or guaranteed prices. They show the inverse relationship: in the example, the security is worth more when market rates fall and less when they rise.
Why some Treasuries are more sensitive to rate changes
Price changes depend on a security’s cash flows and the size and pattern of the market-yield change. When comparing otherwise similar bonds, two features generally matter:
- Maturity: Longer-maturity bonds generally have greater interest-rate sensitivity than shorter-maturity bonds.
- Coupon: Lower-coupon bonds generally have greater interest-rate sensitivity than higher-coupon bonds with otherwise similar features.
The SEC explains these comparisons in its Investor Bulletin. They are general tendencies, not a promise that every Treasury will move by the same amount when yields change.
What a falling price means if you own the Treasury
A lower market price matters to the amount an owner receives if they sell before maturity: the sale takes place at the prevailing market price. If the owner holds the bond to maturity, the SEC says the holder receives the stated interest and face value, subject to the security’s terms. This distinction is why an interim price decline is not the same thing as a change to the coupon or the scheduled face-value repayment.
Treasury backing concerns payment of interest and principal under the security’s terms; it does not eliminate the possibility that market-rate changes affect the security’s value before maturity. That exposure to changing market value is interest-rate risk.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Keep coupon, current price, and yield separate
A price drop does not change a Treasury’s coupon. It changes the price at which the remaining cash flows can be bought or sold, which in turn changes the yield to maturity calculated from that price. The inverse price-yield relationship is a useful rule for fixed cash flows, but it is not a complete model of every daily Treasury price move: other market factors can also affect prices.
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