Bonds Trading Guide: Fixed Income for Traders
Bonds are debt instruments that pay fixed interest — they're the world's largest asset class and a critical signal for interest rates, inflation, and risk sentiment.
Bonds Trading Guide: Fixed Income for Traders
Bonds are the world's largest asset class — and bond yields drive every other market, from stocks and gold to currencies and crypto.
When traders think of markets, they picture stocks. But the bond market is much larger, and bond yields set the cost of capital for every business, government, and consumer. Understanding bonds is essential — even traders who never buy them.
What is a bond?
A bond is a loan from an investor to a borrower (typically a government or corporation). In exchange, the borrower pays periodic interest (the coupon) and returns the principal at maturity.
Key terms:
- Face value — amount repaid at maturity (typically $1,000)
- Coupon — annual interest payment as a percentage of face value
- Maturity — when the bond repays (2y, 5y, 10y, 30y)
- Yield — effective annual return if held to maturity
- Price — current market value (moves inversely to yield)
The price-yield relationship
Bond prices and yields move inversely:
- When yields rise, prices fall
- When yields fall, prices rise
- Longer-duration bonds move more for a given yield change
This inverse relationship is the foundation of bond trading.
Major US Treasury benchmarks
| Maturity | Symbol | What it signals |
|---|---|---|
| 2-year | 2Y | Short-term Fed rate expectations |
| 5-year | 5Y | Medium-term policy path |
| 10-year | 10Y | Long-term growth & inflation expectations |
| 30-year | 30Y | Long-duration inflation & growth |
The 10-year Treasury yield is the world's most important benchmark rate — it sets mortgage rates, corporate borrowing costs, and the discount rate for stocks.
What drives bond prices
| Factor | Effect on yields |
|---|---|
| Fed policy | Higher rates → higher yields |
| Inflation expectations | Higher inflation → higher yields |
| Economic growth | Strong growth → higher yields |
| Risk sentiment | Risk-off → lower yields (flight to safety) |
| Supply (issuance) | More issuance → higher yields |
| Foreign demand | Strong demand → lower yields |
| Deficit concerns | Larger deficits → higher yields long-term |
How to trade bonds
Cash bonds
- Buy individual Treasuries through brokers
- Lower liquidity for retail
- Best for buy-and-hold investors
Bond futures
- ZB — 30-year Treasury, $100,000 contract
- ZN — 10-year Treasury
- ZT — 2-year Treasury
- Highly liquid, leveraged
Bond ETFs
- TLT — 20+ year Treasuries
- IEF — 7–10 year Treasuries
- SHY — 1–3 year Treasuries
- AGG — broad US bond aggregate
Options on futures
- For hedging or speculative strategies
- Defined-risk exposure to rate moves
Why traders care about bonds
Stocks
Higher bond yields = higher discount rate = lower stock valuations, especially for growth stocks. The 10-year yield is the most-watched input for equity valuations.
Currencies
Higher-yielding currencies attract capital. When US yields rise, the dollar strengthens — see our DXY guide.
Commodities
Gold and other commodities are priced in dollars and compete with bonds for safe-haven flows. Higher real yields (nominal yield minus inflation) pressure gold.
Crypto
Bitcoin has shown sensitivity to real yields — rising real yields tend to pressure risk assets including crypto.
Bond trading strategies
Directional trading
- Long TLT when expecting yields to fall
- Short TLT when expecting yields to rise
- Trade on Fed expectations, inflation data, or risk sentiment
Yield curve trades
- Trade the spread between maturities
- See our yield curve guide
Flight-to-safety trades
- Buy Treasuries during equity market stress
- Profit from yield compression as prices rise
Duration management
- Move between short and long-duration bonds based on rate outlook
- Shorter duration when yields rising
- Longer duration when yields falling
Risk management
- Bond volatility is lower than stocks but can spike in crises
- Long-duration bonds (TLT) can move 2–4% in a day
- Use stops — yields can gap on Fed surprises
- Watch correlation with stocks (typically negative, but breaks in inflation regimes)
- Mind futures leverage — ZB is $100,000 notional per contract
Common mistakes
- Confusing yield with coupon (they're different)
- Forgetting price-yield inverse relationship
- Ignoring duration (10-year moves more than 2-year)
- Treating TLT like a stock (it's a long-duration rate bet)
- Assuming bonds are always safe (they have price risk)
How to start
- Track the 10-year yield daily
- Watch Fed funds rate vs 10-year (yield curve signal)
- Trade TLT or IEF before futures
- Follow CPI and FOMC dates closely
- Understand yield curve signals
Bottom line
Bonds are the foundation of global finance. The 10-year yield sets the discount rate for every asset class — stocks, gold, currencies, even crypto. Track yields daily, understand duration, and you'll see markets the way institutions do.