In March 2020, investors panicked. The S&P 500 fell 34% in 23 trading days. But the 10-year U.

S. Treasury bond rallied so hard its yield dropped from 1.56% to 0.

54% — and investors holding those bonds saw prices jump roughly 9% in a month. That gain cushioned portfolio losses at the worst possible moment. Understanding why bond prices rose when yields fell — and why that relationship is the most important mechanical fact in fixed income — is where this lesson begins.

A bond is a loan packaged as a tradeable security. When the U.S.

Treasury issues a 10-year note, it is borrowing money from investors. In exchange, the Treasury promises two things: periodic interest payments (called coupons) and the return of the original loan amount (par value) when the bond matures. Those are the only two cash flows a plain-vanilla bond ever produces: coupon payments at regular intervals, then par at the end.