Yields, prices and duration intuition
Lesson 13 · about 10 min
Equity and futures traders often treat the bond market as a background noise generator. That is a mistake, because bonds are where the macro forces from Module 1 are priced most directly, and the bond market is larger and, on macro questions, usually better informed than the equity market. You do not need to trade bonds to use them. You need three ideas: price and yield move inversely, duration says by how much, and the curve tells you what the market thinks the central bank will do.
Price and yield
A bond is a promise of fixed payments. If you pay less for the same promise, your return (yield) is higher. So when bond prices fall, yields rise, and vice versa. Every headline that says "Treasuries sold off" means yields went up.
The yield on a Treasury of a given maturity is, to a first approximation, the market's expected average short-term rate over that period plus a term premium (covered in lesson 3). The 2-year yield is therefore a compressed forecast of the next two years of Fed policy. The 10-year is a longer forecast plus a bigger premium.
Duration
Duration measures how much a bond's price changes for a given change in yield. Roughly:
price change (%) = − duration × yield change (in percentage points)
| Instrument | Approximate duration | Price move for +1 percentage point in yield |
|---|---|---|
| 3-month T-bill | 0.25 | −0.25% |
| 2-year Treasury | 1.9 | −1.9% |
| 5-year Treasury | 4.6 | −4.6% |
| 10-year Treasury | 8 to 9 | −8% to −9% |
| 30-year Treasury | 16 to 18 | −16% to −18% |
Durations depend on the coupon and current yield; the figures are typical, not fixed. The message is the shape: doubling maturity roughly doubles rate sensitivity, and a long bond can lose as much in a year of rising rates as a stock index in a bad year. That is what happened to long-bond holders in 2022.
Duration is also why the same concept applies to equities. A company whose earnings are expected far in the future has long duration; its valuation falls more when the discount rate rises. This is the mechanism behind NQ underperforming ES when yields jump.
Key idea: Yield up means price down, and duration says by how much: roughly, a 10-year Treasury loses 8-9% of its price for every percentage point rise in its yield. Long-duration equities behave the same way.
The futures you will see quoted
| Contract (CME) | Symbol | Underlying | Rough duration | Who trades it |
|---|---|---|---|---|
| 2-year T-note | ZT | 2-year Treasury | 1.9 | Fed-path traders |
| 5-year T-note | ZF | 5-year Treasury | 4.3 | Fed-path and growth traders |
| 10-year T-note | ZN | 6.5- to 10-year Treasury (cheapest-to-deliver is usually 7-year) | 6 to 7 | The most liquid rate hedge |
| Ultra 10-year | TN | 9.5- to 10-year Treasury | 8 to 9 | A true 10-year exposure |
| 30-year bond | ZB | 15- to 25-year Treasury | 12 to 14 | Long-end traders |
| Ultra bond | UB | 25- to 30-year Treasury | 17 to 20 | Long-end traders |
| SOFR futures | SR3 | 3-month SOFR rate | Short | Direct Fed-path pricing |
Bond futures are quoted in price (points and 32nds), so a rising ZN chart means falling yields. One point on ZN is $1,000 per contract, and a 32nd is $31.25. If you want to watch the bond market without trading it, the 10-year yield itself (many platforms quote it as US10Y or TNX) is easier to read than ZN price.
Reading yield moves on the day
For a data or Fed event, watch the 2-year and the 10-year separately.
- 2-year moving more than the 10-year: the market is repricing the Fed path. A CPI surprise usually does this.
- 10-year moving more than the 2-year: the market is repricing long-run growth, inflation or term premium. Supply announcements, fiscal news and shifts in inflation expectations do this.
- Both moving together by the same amount: a parallel shift. Rare on a single release.
A move of 5 basis points on the 10-year in a day is normal; 15 is a big day; 25 or more is the kind of day that shows up in annual reviews. On the 2-year, 10bp is a big day and 20bp is a serious repricing.
Why an equity trader should care
Three practical reasons:
- The 10-year yield is the discount rate the equity market uses. A sharp rise compresses valuations, and the equity market often takes minutes to hours to fully digest a bond move that has already happened.
- The 2-year tells you what the market thinks the Fed will do, faster and more accurately than any pundit.
- Bonds are the traditional hedge for stocks. When the stock-bond correlation flips positive, as it did in 2022, the hedge stops working, and diversified portfolios lose on both sides. Knowing which regime you are in is Module 6's job.
Try it: Add the 2-year and 10-year yields to your chart layout as separate panels under your index chart. For one week, note each day whether the 2-year or the 10-year moved more, and whether ES rose or fell. You will start to see the bond market leading.
Recap
- Bond prices and yields move inversely; "Treasuries sold off" means yields rose.
- Duration says how much: roughly 2% per percentage point for the 2-year, 8-9% for the 10-year, 16-18% for the 30-year.
- Long-duration equities (far-future earnings) are rate-sensitive for the same reason.
- 2-year moves reprice the Fed path; 10-year moves reprice long-run growth, inflation and term premium.
- The 10-year is the equity market's discount rate and the 2-year is its best Fed forecast; watch both.
See it drawn
Original diagrams for the ideas on this page. Illustrative, not real market data.