The mechanics of a bond
A bond is a loan from an investor to a borrower — typically a government or corporation. The borrower promises to pay periodic interest (the coupon) and return the principal (face value) at maturity. A 10-year Treasury bond at 4.5% coupon means the US government will pay you 4.5% of face value annually for 10 years, then return the principal.
Bond prices and yields move inversely. If you buy a bond paying a 4% coupon and then market rates rise to 5%, your bond becomes less attractive — who would buy your 4% coupon bond when they can get 5% from a new issue? The price of your bond falls until its effective yield (coupon / current price) equals the prevailing market rate.
This inverse relationship is the most fundamental concept in fixed income. Traders who are "long duration" (holding long-dated bonds) are essentially making a bet that yields will fall (and prices will rise). "Short duration" means expecting yields to rise.
Coupon: fixed annual interest payment. Yield to maturity (YTM): the total return if held to maturity, accounting for purchase price vs face value. Duration: sensitivity of price to yield changes. Spread: yield premium over a benchmark (usually Treasuries). Par: face value, typically $1,000.
Government bonds
US Treasuries are backed by the full faith and credit of the US government and are considered essentially risk-free (no credit risk) — they only carry interest rate risk. This makes them the benchmark against which all other bonds are priced. When investors are scared, they buy Treasuries ("flight to safety"), pushing yields down.
Treasury bills (T-bills) mature in less than a year, notes in 2-10 years, and bonds in 10-30 years. The 10-year Treasury yield is the most watched benchmark in global finance — it drives mortgage rates, corporate borrowing costs, equity discount rates, and currency valuations.
Non-US government bonds (German Bunds, UK Gilts, Japanese JGBs) serve similar functions in their own markets. German Bunds are the safe-haven benchmark for European fixed income; JGBs have been notable for the Bank of Japan's extraordinary yield curve control policy.
How bonds trade
Most bonds trade over-the-counter (OTC) between dealers and institutions — unlike stocks, they don't have a central exchange. Prices are quoted as a percentage of face value (par). A bond priced at 97 is trading at $970 for a $1,000 face value bond.
The most accessible bond exposure for equity traders comes through ETFs: TLT (20+ year Treasuries), IEF (7-10 year), SHY (1-3 year), LQD (investment-grade corporate bonds), HYG/JNK (high-yield). These trade like stocks and give direct bond market exposure without needing to access OTC markets.
Bond futures (ZB, ZN, ZF) trade on the CBOT and allow futures traders to take leveraged directional positions on rates. ZB (30-year Treasury bond future) and ZN (10-year note future) are the most liquid and are closely watched by equity traders as real-time rate barometers.