What Is a Bond — And Why Should Traders Care?
Bonds drive stock markets more than most equity traders realize. The relationship between bond yields and stock prices is one of the most important in all of finance.
Basics · July 12, 2026 · 6 min read
A bond is a debt instrument — a loan made by an investor to a borrower (government or corporation) in exchange for regular interest payments (coupons) and return of principal at maturity. When you buy a US Treasury bond, you are lending money to the US government. Bonds are the foundation of the global financial system and the most important asset class most stock traders never study.
How Bond Prices and Yields Work
The most critical concept in bonds: price and yield move inversely. When bond prices rise, yields fall. When bond prices fall, yields rise. A $1,000 bond paying $50/year has a 5% yield. If investors pay $1,100 for that bond, the $50 payment is now only 4.5% of the purchase price — the yield has fallen. This inverse relationship is the source of market dynamics that confuse many traders: 'bonds selling off' means yields are rising, which typically pressures stocks.
The 10-Year Yield: The Most Important Number
The US 10-year Treasury yield is arguably the single most important number in global finance — the 'risk-free rate' against which all other investments are compared. When the 10-year yield rises, the relative attractiveness of all risk assets is reduced. When yields fall, stocks look more attractive by comparison. This is why stock markets often fall when 10-year yields rise sharply and rally when yields fall.
The Yield Curve and Recession Prediction
The yield curve plots interest rates across different bond maturities. An inverted yield curve — when short-term rates exceed long-term rates — has preceded every US recession in the modern era. Monitoring the 2-10 year spread is one of the most reliable long-term macro signals available to traders.
What Is a Pip in Forex Trading?