100 terms

Bonds and rates

2s10s: The 10-year Treasury yield minus the 2-year yield, the most quoted single measure of yield curve slope.
3m10s: The 10-year Treasury yield minus the 3-month bill yield, the curve spread with the strongest historical recession-forecasting record.
Accrued interest: The coupon interest a bond has earned since the last payment date, which the buyer pays to the seller on top of the quoted price.
Agency bond: Debt issued by a government-sponsored enterprise such as Fannie Mae, Freddie Mac or the Federal Home Loan Banks; near-Treasury credit with a small yield pickup.
Asset swap spread: The spread over a floating benchmark such as SOFR that an investor earns by buying a fixed-rate bond and swapping its coupons into floating.
Auction tail: The gap between the yield an auction stops at and the yield the security traded at in the when-issued market just before; a positive tail means demand was weaker than expected.
Basis point (bp): One hundredth of a percentage point, the standard unit for quoting interest rates, yields and credit spreads.
Bear flattener: The curve flattens because short yields rise faster than long yields; a selloff led by the front end, the signature of a hiking cycle.
Bear steepener: The curve steepens because long yields rise faster than short yields; a selloff led by the long end, usually about supply, inflation or term premium.
Bid-to-cover ratio: Total bids received at a Treasury auction divided by the amount sold; a crude but closely watched gauge of how much demand showed up.
Bond: A tradable loan: the issuer borrows money, pays interest on a schedule, and returns the face amount on a set date.
Bond equivalent yield (BEY): A convention that restates a yield on a semi-annual compounding basis so instruments with different payment frequencies can be compared fairly.
Bootstrapping (the curve): Building a zero-coupon curve step by step from observable coupon bond prices, solving for each new spot rate using the ones already known.
Breakeven inflation: The nominal Treasury yield minus the TIPS yield of the same maturity: the average inflation rate at which both bonds return the same amount.
Bull flattener: The curve flattens because long yields fall faster than short yields; a rally led by the long end, often a growth scare or flight to quality.
Bull steepener: The curve steepens because short yields fall faster than long yields; a rally led by the front end, typically pricing rate cuts.
Butterfly (curve trade): A three-leg curve trade on the belly of the curve against the two wings, expressing a view on curvature rather than direction or slope.
Callable bond: A bond the issuer may redeem early at set prices on set dates; the investor is effectively short a call option and is paid a wider spread for it.
Carry (fixed income): The income a bond position earns over its funding cost while nothing else changes; positive when the bond yields more than the repo rate.
Certificate of deposit (CD): A time deposit at a bank paying a fixed rate to a fixed date; large denominations are negotiable and trade in the money market.
Cheapest to deliver (CTD): The bond in a Treasury futures deliverable basket that is least expensive for the short to deliver after adjusting for conversion factors — the bond the contract effectively tracks.
Clean price: A bond's quoted price excluding accrued interest, used so the quote does not sawtooth upward between coupon dates.
Commercial paper (CP): Short-term unsecured corporate debt, usually issued at a discount with a maturity under 270 days, used to fund working capital.
Convexity: The curvature of the price-yield relationship: the second-order correction showing that bond prices gain more on rallies than they lose on selloffs.
Corporate bond: Debt issued by a company, paying a coupon above the government yield of the same maturity to compensate for default risk and worse liquidity.
Coupon: The fixed annual interest a bond pays, expressed as a percentage of par value and usually paid in two instalments six months apart.
Current yield: Annual coupon divided by current market price; a quick income measure that ignores any gain or loss from holding to maturity.
Day count convention: The rule that decides how many days of interest have accrued between two dates, which differs by market and changes the cash amount.
Debt ceiling: A statutory cap on total US government borrowing; while it binds, the Treasury runs down its cash balance and stops issuing new net debt, which distorts bill yields and repo.
Dirty price (invoice price): The total cash a bond buyer actually pays: the quoted clean price plus accrued interest since the last coupon.
Discount (bond trading below par): A bond whose market price is below its face value, which happens when its coupon is lower than the yield the market now demands.
Duration: A measure of how much a bond's price moves when yields change, and of the average time you wait to receive its cash flows.
DV01 (dollar value of a basis point): The change in a bond or futures contract's price for a one-basis-point change in yield — the unit in which all interest rate hedges are sized.
Effective duration: Duration calculated by actually repricing a bond under small up and down rate shifts, used when embedded options make the cash flows uncertain.
EFFR (effective federal funds rate): The volume-weighted median rate at which banks actually lend reserves to each other overnight, published daily and expected to sit inside the target range.
Expectations hypothesis: The theory that long-term yields are simply the average of expected future short-term rates, implying forward rates are unbiased forecasts.
Extension risk: The risk that prepayments slow when rates rise, lengthening a mortgage bond's average life just as higher yields make the longer exposure most painful.
Fisher equation: The relationship stating that the nominal interest rate approximately equals the real rate plus expected inflation, which is the backbone of how bond yields are decomposed.
Flat yield curve: A curve where short and long yields are nearly equal, usually seen late in a hiking cycle as the market prices the end of tightening.
Flattener: A trade that profits when the gap between long and short yields narrows, typically short the short maturity and long the long one.
Floating rate note (FRN): A bond whose coupon resets periodically off a short-term benchmark such as SOFR plus a fixed spread, so its price barely moves with rates.
Forward rate: The interest rate for a future period implied by today's spot rates; what the market is effectively pricing in for borrowing later.
General collateral (GC): Repo where any bond from a broad eligible class may be delivered, so the rate reflects the cost of cash rather than demand for a specific bond.
Humped yield curve: A curve that rises to a peak in the intermediate maturities and then falls, so mid-curve yields sit above both short and long ones.
Indirect bidder: An auction bidder who submits through a primary dealer rather than directly; largely foreign central banks and asset managers, and a rough proxy for overseas demand.
Interest rate risk: The risk that a bond or portfolio loses value because market yields rise; measured by duration and hedged with futures or swaps.
Inverse price-yield relationship: Bond prices and yields always move in opposite directions, because the coupon is fixed and only the price can adjust to a new required return.
Key rate duration: Sensitivity of a bond or portfolio to a change in one specific point on the yield curve, holding the rest of the curve fixed.
LIBOR: The retired benchmark based on banks' estimates of their unsecured borrowing costs, replaced by SOFR and other transaction-based rates.
Macaulay duration: The weighted average time in years until a bond's cash flows arrive, with each payment weighted by its present value share of the price.
Make-whole call: A redemption provision that lets the issuer call a bond early only by paying the present value of all remaining cash flows discounted at a small spread over Treasuries.
Maturity: The date the issuer repays a bond's face value and the security ceases to exist; also shorthand for how long is left until that date.
Modified duration: Macaulay duration divided by one plus the yield per period; the approximate percentage price change for a 1% move in yield.
Money market: The market for borrowing and lending with maturities under one year: bills, repo, commercial paper, CDs and bank deposits.
Mortgage-backed security (MBS): A bond backed by a pool of mortgages that passes homeowner principal and interest through to holders; agency MBS carry a guarantee against default but not against prepayment.
Municipal bond (muni): Debt issued by US states, cities and other public bodies; interest is usually exempt from federal income tax, so headline yields look low until you gross them up.
Negative convexity: When a bond's price gains less on a rally than it loses on a selloff, caused by an option the issuer or borrower holds against you.
Nominal yield: A yield quoted in plain currency terms, with no adjustment for inflation; what ordinary Treasuries and corporate bonds pay.
Normal (upward-sloping) yield curve: A curve where longer maturities yield more than shorter ones, the usual shape in an expanding economy with stable policy.
Off-the-run: Any Treasury security that is no longer the most recently auctioned one at its maturity; slightly cheaper and less liquid than the on-the-run benchmark.
OIS (overnight index swap): A swap exchanging a fixed rate for compounded overnight rates over a period, used to read the market's expected average policy rate.
On-the-run: The most recently auctioned Treasury security at a given maturity; it is the most liquid issue, trades at a premium to older ones, and is what quoted benchmark yields refer to.
Option-adjusted spread (OAS): The Z-spread after removing the value of any embedded options, so that callable, putable and mortgage bonds can be compared with plain bullet bonds on equal terms.
Overnight reverse repo facility (ON RRP): A Fed facility where money funds and others park cash overnight at a fixed rate, setting a floor under short-term interest rates.
Par yield curve: The curve of coupon rates at which bonds of each maturity would price exactly at par; the shape most commonly shown as the yield curve.
Premium (bond trading above par): A bond whose market price is above face value, which happens when its coupon is higher than the yield the market currently demands.
Prepayment risk: The risk that mortgage borrowers repay early, usually to refinance when rates fall, handing the investor cash back at exactly the wrong moment.
Primary dealer: A bank or broker-dealer approved to trade directly with the New York Fed, obliged to bid at every Treasury auction and to make markets in government securities.
Putable bond: A bond the holder may sell back to the issuer at a set price on set dates; the investor is long an option, so the bond yields less than a comparable bullet.
Quarterly refunding announcement: The Treasury's quarterly statement of how much it will borrow and in which maturities, published in early February, May, August and November.
Real yield: The return on a bond after stripping out inflation, quoted directly by TIPS and calculated for nominal bonds as yield minus expected inflation.
Real yield: Return paid out of a protocol's actual revenue, such as trading fees or interest, rather than out of newly issued tokens.
Reinvestment risk: The risk that coupons and maturing principal have to be reinvested at lower rates than the yield you originally locked in.
Repo (repurchase agreement): A secured overnight loan structured as a sale of securities with an agreement to buy them back the next day at a slightly higher price.
Reverse repo: The other side of a repo: lending cash and taking securities as collateral, with an agreement to sell them back the next day.
Roll-down: The price gain a bond earns simply by ageing into a lower point on an upward-sloping yield curve, with no change in the curve itself.
Running yield: Another name for current yield, used mainly in UK and European bond markets: annual income divided by the price you paid.
Sinking fund: A provision requiring the issuer to retire part of an issue each year, either by open-market purchase or by redeeming bonds selected at random at par.
SOFR (Secured Overnight Financing Rate): The volume-weighted median rate on overnight Treasury repo, published daily by the New York Fed and the main US dollar benchmark rate.
Special (repo): A security so in demand as collateral that its owners can borrow cash against it below the general collateral rate.
Spot rate: The yield on a single cash flow received at one future date, with no intermediate coupons; the true building block of bond pricing.
Spread duration: How much a credit bond's price moves for a one percentage point change in its credit spread, holding Treasury yields constant.
Standing repo facility (SRF): A Fed facility where eligible counterparties can borrow cash against Treasuries at a fixed rate, capping how high repo rates can go.
Steepener: A trade that profits when the gap between long and short yields widens, typically long the short maturity and short the long one.
STRIPS: US Treasury coupons and principal split into individually tradable zero-coupon pieces, each maturing on a single date.
Swap spread: The fixed swap rate minus the Treasury yield of the same maturity, a gauge of balance sheet costs, hedging demand and Treasury supply.
TBA market (to-be-announced): The forward market in agency MBS where trades specify issuer, coupon and settlement month but not the actual pools, which are revealed two days before settlement.
Term premium: The extra yield investors demand for holding a long bond instead of rolling short ones, over and above expected future short rates.
TIPS (Treasury Inflation-Protected Securities): US Treasuries whose principal is adjusted with the consumer price index, so the coupon and redemption value both rise with inflation.
Treasury auction: The competitive sale through which the US Treasury issues new debt; all winning bidders pay the same stop-out yield, and the result is a live read on demand for duration.
Treasury bill (T-bill): A US government debt security maturing in one year or less, sold at a discount to face value with no coupon; the difference between price and par is the return.
Treasury bond (long bond): A US government bond with an original maturity beyond ten years, currently the 20-year and 30-year; the longest and most rate-sensitive part of the curve.
Treasury note (T-note): A US government bond with an original maturity of two to ten years, paying a fixed coupon every six months; the 10-year note is the world's main rates benchmark.
When-issued trading (WI): Forward trading in a Treasury security between the announcement of an auction and its settlement, which produces the price benchmark used to judge the auction result.
Yield to call (YTC): The return on a callable bond assuming the issuer redeems it at the earliest call date rather than letting it run to maturity.
Yield to maturity (YTM): The single discount rate that makes a bond's future coupons and principal equal to its current price; the standard measure of a bond's return.
Yield to worst (YTW): The lowest yield a bond can produce across every possible redemption date, and the conservative number credit investors actually quote.
Z-spread (zero-volatility spread): The constant spread added to every point of the government zero-coupon curve that makes the present value of a bond's cash flows equal its market price.
Zero curve: The set of spot rates for every maturity, used to discount individual cash flows rather than whole bonds.
Zero-coupon bond: A bond that pays no interest and is sold well below face value, with the entire return coming from the climb back to par at maturity.

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