"rates pushing prices down..."

Discussion in 'Fixed Income' started by stevenpaul, Aug 10, 2021.

  1. I've always wanted to ask about this, but it comes down to quibbling over language so it never seemed thread-worthy. Still, I can't resist.

    Everyday I hear journalists and pundits talking about yields, making statements like "yields are rallying today, causing prices to drop." Just now, I heard that reporter on CNBC Rick Santelli, saying something to that effect. "Yields are rising, sending the prices lower."

    Am I right in thinking this perception is exactly backwards? The ONLY way yields can ever rise is if bond traders sell all the bonds at a certain price point, thus opening the market to the next bid lower. When that happens, the yield is effectively higher because the price went down but the income from the bond is fixed. The bond now yields more than it did before because this fixed income-bearing instrument was cheaper to buy, so it's relative rate of return is now higher.

    Therefore, rates don't affects prices. It's always the other way around: Buying and selling of bonds affects the price of bonds, which in turn changes the relative yield of the bond. It's the same with stock dividends. No one would ever say "the dividend yield of Walmart went up, causing the price of Walmart stock to go down."

    I'm just trying to figure out why there is such a pervasive, ubiquitous emphasis on yield as begin causally linked to the price of bonds. Yields never cause prices to fluctuate. Price fluctuations stemming from normal trading activity--and that alone--causes yields to fluctuate.
    murray t turtle and MrMuppet like this.
  2. Specterx


    A bond's yield is its only salient attribute - the only reason one would ever buy it, with a few special-case exceptions. People buy equities, and stuff like Bitcoin, for a whole universe of reasons beyond the dividend yield (if any).
  3. SunTrader


    Well actually there a whole myriad of reasons why bonds are bought as well.

    Mutual, Pension and Hedge fund requirements, and flight to safety are two of the biggest - plus plain old trading short and long term.
  4. nowadays, the yield of short term bond rises a few nicks that would set alarm in the media (markets are still in the bullish phase, in the long term sense).
  5. MrMuppet


    dis guy gets it
  6. SunTrader


    It can be described either way geez. Dog chasing its tail.

    Bonds are priced based on yield, time to maturity, coupon if any, etc. All wrapped up in good old supply/demand.

    Although Santelli went over the teabag cliff years back he knows the bond market like few others. If he said what is claimed (?) he misspoke or could have used clearer language. We all do on occasion. Some more than others.
  7. MrMuppet


    nope...it cannot.
    The coupon doesn't matter when the overall yield is determined by the price of the bond. When I go ahead and sell the minimum amount it requires to flip the bid, I already increased the yield. Yield is a function of supply and demand. Always.
  8. SunTrader


    Yeah ok forget coupon. Yield/price (one and the same) is a function of supply demand.

    But supply/demand of course doesn't just happen.

    But to the original point saying price made yield drop or rise, or saying yield made price drop or rise is the same thing. A number is a number. No difference just because one has a percent sign after it.
    MrMuppet likes this.
  9. I think your mistaking what they’re saying. No one says “yields are rising therefore prices are down.” People say “yields are rising, as the markets move lower.”

    When yields and stocks rise = investors are positioning (marginally) for more risk. AKA “risk on.”

    When yields fall and stocks fall = investors are positioning for less risk. AKA “risk off”.

    There can be a dollar component too.
  10. To SunTrader's point above, yes, I'm quibbling about $ signs vs. % signs. It does amount to the same thing in the end. I admitted as much in my opening sentence of the original post. But I do think it's just plain silly the way people insist on speaking about rates.

    Oh yes they do say that, longandshort. They absolutely say things like "yields are rising, causing the prices to drop." I hear it all the time. The one thing I never hear is "prices are rising, causing yields to drop."

    I would like the latter so much more. You can only buy or sell bonds by exchanging them for the money they are worth. There are only so many bonds available for trade at any given price point. When supply is exhausted (or flooded), price changes accordingly. Then and only then can we talk about changes in yields.

    I must say, even "yields are rising and the markets move lower" bothers me. The market moved lower, and as a result, the yield is now higher.

    I realize the whole process happens simultaneously, but I swear the various journalists phrase it to suggest that yields lead and prices follow, when if anything it is the other way around. The only way yields change is if money changes hands enough to move price.
    #10     Aug 11, 2021