How everything will change when bonds enter a bear market
It's been a rough couple days for the bond market.
Early Thursday, the yield on German bund and US 10-year Treasury note hit year-to-date highs before sharply rebounding, sending global markets into a bit of chaos.
But according to Bloomberg's Tom Keene, we haven't seen markets enter a real bear market yet for one big reason: we're not talking like it yet.
"A bond bear market is different: everyone speaks yield, yield, yield and then one day they wake up and talk price, price, price as in lower," Keene wrote Thursday.
Here's the basic outline on bond yields and prices Keene is talking about.
Bonds are sold with a yield - paid as coupon in regular intervals - at a "par value" of 100 cents on the dollar.
As the price of a bond rises, meaning investors are willing to pay more than 100 cents on the dollar to receive the coupon payments, the yield of that bond falls. As the price of bonds falls, the yields rise.
And so when we say things like, "bonds are selling off," what we mean is that the price investors are willing to pay for that coupon has declined and the yield has risen.
Right now, in Keene's opinion, the discussion around bonds is yield because while there are still big swings in the bond market, the situation isn't so dire.
The discussion turns to price when you've got to actually sell those bonds. Then, things are serious.