Bond Market Basics: What a Bond Is and How Yields Work

A bond is essentially a loan. A government or company borrows money from investors and promises to pay it back at a set future date, called maturity, while paying periodic interest along the way, called the coupon. Government bonds, like US Treasuries, German Bunds, or UK Gilts, are especially important to traders because their yields reflect what the market expects interest rates and inflation to do over time.

The relationship every trader needs to memorize is that bond prices and bond yields move in opposite directions. If a bond pays a fixed coupon and its price rises, the effective return to a new buyer falls, so yield goes down. If the price falls, that same fixed coupon represents a bigger percentage return, so yield rises. This happens constantly as investors buy or sell existing bonds based on changing expectations about future interest rates.

This matters enormously for Forex because currencies tend to flow toward higher-yielding, safer assets. When a country's bond yields rise relative to another country's, it often attracts capital seeking that better return, which tends to strengthen that country's currency, all else being equal. This is part of the logic behind carry trades and why traders watch the yield differential between, for example, US Treasuries and German Bunds when trading EUR/USD.

Bond yields also react very quickly to economic data and central bank commentary, often faster than currencies do, which is why some traders watch bond markets as an early signal. A sharp, unexpected move in the 10-year Treasury yield around a CPI or jobs report is frequently the first clue that a bigger currency move is coming, even before it shows up on the Forex chart.