02 · Bonds and Interest Rates: The Pricing Anchor of Assets
This article is an instrument map: it covers only the big picture and the core concepts. To dig deeper, go straight to Chapter 22 · Bonds & Rates Deep Dive — that is the main course on this topic.
Stocks, forex, and crypto all have their speculators, but what truly determines "how much money is worth" are bonds and interest rates. When the Fed hikes, global stocks tremble, gold falls, crypto crashes — the starting point of the transmission chain is always the bond market. This is not proprietary knowledge for "bond people" — it is foundational common sense every trader should own.
1. The Instrument Map: One Table for the Bond World
| Type | Issuer | Risk | Return | Notes |
|---|---|---|---|---|
| Treasury (gilt) | Central government | Near zero (in domestic currency) | Low | The risk-free-rate benchmark; domestically book-entry/savings treasuries |
| Local government bonds | Local governments | Very low | Slightly above treasuries | Backed by local fiscal credit |
| Financial bonds | Banks and other financial institutions | Low | Medium | Policy-bank bonds are a mainstay institutional allocation |
| Corporate bonds | Corporations | Depends on credit rating | Medium-high | Lower rating = higher yield (credit spread) |
| Convertible bonds | Listed companies | Hybrid equity-debt | Medium | Convertible into stock at a set price; floor below, open ceiling above |
| Subordinated/perpetual bonds | Banks/corporations | Higher | Higher | Low priority in repayment; "write-down" clause risk |
| Negotiable certificates of deposit (NCDs) | Banks | Low | Short-term pricing | Interbank money-market instrument; individuals cannot buy directly |
Credit spread: for the same maturity, a corporate bond's yield minus the treasury yield is the market's "default compensation" to it — spreads widen in bad times and narrow in good times (see 04 · Credit Bonds & High Yield).
2. Five Core Concepts (One Sentence Each)
- A bond is an IOU: five elements — face value, coupon rate, maturity, price, yield to maturity (YTM). The coupon rate is "the rate written in the contract"; YTM is "the actual annualized return from buying at the current price" — the two differ because the price moves.
- Prices and yields move strictly inversely: rates rise → old bonds sell at a discount → the yield on the cheaper entry rises. Duration measures the sensitivity — the longer the duration, the harder the hit (the mechanism behind the 2022 long-Treasury crash).
- The risk-free rate is the pricing baseline of all assets: fair asset value = future cash flows ÷ (1 + risk-free rate + risk premium) ^ years. China's domestic reference is the ChinaBond 10Y (in recent years as low as around 2%, per latest quotes). Higher rates → stocks, housing, and long bonds all fall; lower rates → capital is forced to "search for yield".
- A yield-curve inversion is a recession warning: the short-end yield above the long end is one of history's most reliable recession signals — but it is a "signal", not a "trigger"; after inversion the economy often holds on for another six months or more, so don't front-run.
- The US 10Y is the global asset-pricing anchor: when its yield rises, gold, richly valued growth stocks, and crypto all take pressure; watch its marginal change (direction), not the absolute level.
3. Navigation: Chapter 22 Deep Dives
Every concept above is expanded and made operational in the Chapter 22 deep-dive series:
| What to dig into | Read |
|---|---|
| Treasury types / YTM and duration / numeric inverse-price examples / how to buy | 01 · Treasury Investment in Practice |
| Interbank vs. exchange / reverse repo / savings bonds / bond funds / convertibles / retail access cheat sheet | 02 · China Bond Market in Practice |
| Curve shapes / inversion and recessions / curve trading / hike-cut transmission / the China-US spread | 03 · Yield Curve Trading |
| Credit spreads / the math of high yield / default and liquidity traps | 04 · Credit Bonds & High Yield |
Risk Warning
⚠️ Risk Warning
"Risk-free" is relative: credit risk (default), interest-rate risk (price swings), and inflation risk (purchasing-power erosion) all exist for bonds; signals such as curve inversion are statistical patterns and must not be the sole basis for a trade. All figures here are teaching-basis reference values — always defer to the latest quotes and regulations. This article does not constitute investment advice.