Bond Analogies

I’ve been writing this stuff for a lot of years now, and every so often I get to the part where I explain how, when interest rates go up, bond prices go down and vice versa. This is largely true of interest rates and stock prices, too. But with bonds, I’m never sure my reader or listener fully grasps that it’s absolute — just two sides of the same coin. Like: the more water there is in the glass, the less empty it is. (Not “the less empty it tends to be.”) Or like a see-saw: when one side goes down, the other side goes up. (Not: “unless there’s some flexibility in the wood.”) No matter how heavy the children on the see-saw, it never bends or it snaps.

There is not the slightest magic or wonder to this, except that it’s so hard to explain to some people. If you have a 30-year bond that yields 7% — $35 a bond every six months for 30 years — and if someone reports that the going rate on such bonds has fallen to 6.6%, it can only mean that the price of the bond has risen above $1,000, such that, when you do all the math, those twice-a-year $35 checks work out not to the 7% they would at the stated $1,000 price (par, for a bond), but to just 6.6%.

I’ve thought of another analogy for this: foreign exchange. Any two currencies will do, but let’s take the US and Canadian dollars. If the US dollar goes up against the Canadian dollar, is there any conceivable way the Canadian dollar does not simultaneously and in a precisely symmetrical way go down against the US dollar? Not sometimes, or “isn’t that remarkable,” but just two pieces of a single, interlocked thing.

In fact, this is so simple and obvious I suspect it was very clear to you until reading this comment. Now, you’re not so sure.