A government bond is essentially a “IOU” from a sovereign nation. When you buy a 10-year U.S. Treasury, you are lending the government money for ten years. In return, they pay you a fixed “coupon” (interest) and return your “principal” (the original loan) at the end.
The most important thing to understand is the Inverse Relationship:
When bond prices go Up, interest rates (yields) go Down.
Why? If you hold a bond paying 5% and the market rate drops to 3%, your 5% bond becomes more valuable, so people will pay more to buy it from you. Bonds are the “safety net” of a portfolio, but as we saw in 2022, when inflation spikes and the Fed raises rates rapidly, even “safe” bonds can lose value quickly.
