Is there a Bond-Markets-for-Dummies tutorial that you know of? I understand what they are, but how they’re played, how they’re valued, why they’re worth less the higher the yield.. I can’t get my head around the bond & treasury markets.
Because the coupon is fixed.
Let's say you buy a bond for $1,000 with a 6% coupon. You recieve $60 a year.
Now lets say a year later new bonds (same issuer, same duration) pay out 8% or $80 a year. Well, no one will want to buy your $60 a year in income for $1,000 because they can get $80 in income for $1000.
Therefore your bond is worth less than it was a year ago. Now if you hold it to maturity you will still get your $1,000 but if you sell it early you need to do it at a price where that $60 in income equals an 8% yield (or about $750).
There’s no tutorial or “bond lingo for the novice” that I know of that helps “decode” the sort of slang that Denninger is tossing out there... you have to sort of read a lot of bond lingo with numbers to start getting the knack of it.
You also have to understand that bonds are priced to a benchmark. Everything in the bond market except the benchmark rates is a “spread” - or, if you’re seeking to make a derivative play off the benchmark, a swap.
The benchmarks are bonds like the 10-year US Treasury Bond, Gilts (in the UK), etc. We’re talking sovereign debt. There are benchmarks at different timeframes - 2, 5, 10 years on Treasuries. 30 year T’s are sometimes used as a benchmark on 30 year corporate and muni paper, but sometimes not - the US doesn’t sell too much 30 year paper anymore since the Clinton administration. Recently there was some new issue 30 year out there.
That’s the very beginning of how the bond lingo is set up - they talk of spreads being “wider” or “tighter” vs. the benchmark or swap, and they’ll talk in fractional percentage points, or basis points (1/100th of a percent). “Par” means the $100 price point on a bond - bonds priced “above par” are selling for more than $100, which indicates demand and therefore a decrease in the yield to maturity. Bonds sold below par mean that the market doesn’t like it too well for the issued yield, so the market is going to sell it off until the yield to maturity comes in line.
What you have to realize about the bond market is that they’re dealing with different dimensions than the stock market is. The bond market is all about pricing risk of default vs. yield, not pricing the opportunity of future earnings power in a stock.