My man Matt Graham at MBS Live has some critical comments this morning about how to interpret bond and rate news you read. Rates (also called yields) are tied to bonds, and it’s an inverse relationship:
– Rates (aka yields) drop when bond prices rise in a buying rally. Rallies tend to occur when investors are seeking safer investments due to economic or geopolitical uncertainty. Bad news helps rates.
– Rates (aka yields) rise when bonds drop in a selloff. Selloffs tend to occur when economic growth or positive geopolitical outlooks cause investors believe they can get better returns in other non-bond investments. Good news hurts rates.
Matt points out that it can be confusing because some financial analysts and journalists use “higher” and “lower” in reference to bond rates/yields, and some use “higher” and “lower” in reference to bond prices. Here’s excerpt and link below so you know what to look for:
The more institutional the source (i.e. analysts at big name firms writing for institutional investors), the more likely they are to use “higher” to refer to PRICES. Thus “higher” = “stronger” = “lower yields.” Frustratingly enough, many of those institutional sources will also lapse and use those words in the opposite way to refer to yields. I personally think it’s much more intuitive to simply talk about rates/yields moving higher or lower, but in any case, I attempt to always specify whether I’m talking about yields/rates vs PRICE.
If you’re reading an article from a mainstream news outlet—especially if the author isn’t a dedicated bond person—chances increase exponentially that “strength,” “improvement,” and “gains” may be used to refer to bond YIELDS moving higher. They’re thinking about bond yields in terms of an investment that’s going to pay better over time. This is commonly seen in stock-focused articles comparing stock returns to bond yields.
– A Note On How To Read Bond Market News