How a bond reprices when the economy moves
You own a $1,000 par bond with a 5% coupon (= $50/year for 10 years). When the economy cools and rates fall to 3%, buyers bid your bond up to $1,170.60 — your $50 is now worth more than a new bond’s $30. When the economy heats up and rates rise to 7%, your bond drops to $859.53 — buyers won’t pay $1,000 for a $50 stream when they can get $70 elsewhere. Your $50/yr never changes. Only the price does, and the yield moves opposite to it.
The two markets, in one picture
The primary market is where the issuer (a government or company) sells a brand-new bond at today’s prevailing rate. The secondary market is where every existing bond reprices to stay competitive with whatever the primary market is offering today.
If you bought a $1,000 bond paying 5% and rates later move to 3%, no rational buyer will pay $1,000 for a new bond paying only $30/year when yours pays $50. So your bond’s price gets bid up to the point where its total return equals 3% — that point happens to be $1,170.60. The reverse is also true: rates rise to 7%, your bond drops to $859.53.
Why this matters for your mortgage
The 10-Year Treasury yield is the benchmark for long-term US lending. When that yield rises, every new mortgage rate rises with it — banks have to pay more to attract capital, so they charge more to lend it. That’s why a Fed rate decision, an inflation print, or a geopolitical shock can move your mortgage rate weeks before you feel it in any other part of your financial life.
The math, in one line
The price of a bond is the present value of its coupons plus its par value, discounted at the prevailing market yield. When that yield falls, the discount shrinks and the price rises. When the yield rises, the discount grows and the price falls. That’s the entire mechanic — everything else is bookkeeping.