Why does treasury bond price drop when bond yield increases?


Answer: First, let's see the definition of a bond's price and yield. A bond's price is what investors are willing to pay for an existing bond. A bond's yield is the return to an investor from the bond's interest, or coupon, payments. The typical treasury bond has a fixed yield for X years (X = 5, 10, etc) from the time it is purchased. When we say bond yield increases, it is referring to the newly issued bond will have a higher yield than previously issued bond. Because those new bonds provide higher yield, the existing bonds will need to drop its price otherwise people won't buy them, they would just buy the newly issued bonds.