Treasury Prices and Yields Move in Opposite Directions
For an existing fixed-rate Treasury security, a higher market yield requires a lower price and a lower market yield requires a higher price, all else equal.
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A Treasury Coupon Rate Is Not the Same as Yield to Maturity
The coupon determines contractual interest payments on par value, while yield to maturity also reflects the price paid for those cash flows.
What it is
Treasury notes and bonds pay a stated coupon on their par value. Yield to maturity is an annualized return measure that incorporates the security’s market price, coupon cash flows and repayment of principal at maturity.
Why it matters
A Treasury can trade above or below par, so the coupon printed on the security can differ from the return implied by buying it at the current market price.
Example
When a note’s yield to maturity is above its coupon rate, TreasuryDirect’s pricing relationship implies that the note trades below par.
Common mistake
Using the coupon rate and current market yield as interchangeable descriptions of a Treasury’s return.
What to watch
- coupon rate
- market price
- yield to maturity
- par value
- remaining maturity
Key takeaway
Coupon describes promised interest on par; yield describes the return implied by the price paid for the security’s cash flows.
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Sources
U.S. Treasury · U.S. Securities and Exchange Commission
Educational and informational purposes only. Not investment advice.