12.3 Fixed Income and Bonds

Fixed income is the third cash-market unit in Section Nine. CMT Level I is not a Series 7 bond desk exam. It needs enough debt literacy for cross-asset reading: prices versus yields, who issues, how quotes look, why Treasuries sit under everyone else's yield, and what a yield curve is. Independent OpenExamPrep teaching for these CMT Level I bond topics stays on those Program Guide jobs. Advanced Techniques remains 26% of the 132-question sitting; a bond question here is still a technician's question—what does this series do to the rest of the tape?

Price and yield move inversely

A vanilla coupon bond pays a fixed periodic coupon and par (face value) at maturity. Once the bond is issued, that coupon does not change. The market yield (the discount rate that sets the present value of remaining cash flows equal to the dirty price) does change, every session. The only way a fixed coupon can compete with a new, higher market yield is for the price of the old bond to fall. The only way it can compete with a new, lower market yield is for the price to rise.

That is the inverse relationship: yields up, prices down; yields down, prices up, for an existing fixed-coupon bond. It is arithmetic, not a slogan.

Worked one-year bond. Par $1,000, 5% annual coupon, one year to maturity. The holder will receive $1,050 in one year.

• If the market yield is 5%, price = 1,050 / 1.05 = $1,000 (par).
• If the market yield jumps to 6%, price = 1,050 / 1.06 ≈ $990.57 (discount).
• If the market yield falls to 4%, price = 1,050 / 1.04 ≈ $1,009.62 (premium).

Same coupon, same maturity, different yield, different price. Stretch the remaining life and the swing grows. A two-year 5% annual bond priced at a 6% yield is 50/1.06 + 1,050/1.06² ≈ $981.67—a larger drop than the one-year bond. Longer maturity and lower coupon mean more of the value sits in distant cash flows, so the same yield change moves price more. Level I does not require a Macaulay duration formula. It does require that you not say a 30-year bond and a 90-day bill have the same price sensitivity.

Zero-coupon instruments (including Treasury bills in spirit, and STRIPS) have no coupon to cushion the move; all return is in the pull to par. Floating-rate notes reset the coupon toward the market; their prices usually move less than a fixed-coupon note of similar maturity. If a stem does not say floater, assume a fixed coupon.

Exam trap: thinking the coupon itself changes when yields change. The coupon is in the indenture. The yield is in the market. The price is the bridge.

Major types of issuers

Debt is classified first by who owes the money.

Investment-grade corporate debt is rated BBB−/Baa3 or higher by the major rating scales. High-yield is below that line. The rating is not a technical indicator. The spread that rating helps produce is a risk-appetite series technicians watch.

Securitized products (mortgage-backed, asset-backed) are still debt claims. Level I wants you to know they exist as issuer types, not to tranch a CMBS.

Basic terms: issuer, coupon, maturity

Three fields identify the instrument in almost every stem.

Issuer. The legal borrower (United States of America, a corporation, a city, an agency). Credit and the spread start here.

Coupon. The contractual interest rate on par, plus the payment frequency (U.S. Treasuries and most corporates pay semiannually). A 5% coupon on $1,000 par pays $50 per year, usually $25 twice a year. A zero pays no coupon; it is issued at a discount and pays par at maturity. Distinguish coupon rate from current yield (annual coupon / price) and from yield to maturity (the discount rate that prices all remaining cash flows). Those three numbers match only when the bond is at par and the conventions cooperate.

Maturity. The date par is due (unless called earlier). Bills are short-term discount paper (a year or less). Notes are intermediate (Treasury notes currently include 2- through 10-year benchmarks). Bonds are the long end (the 20- and 30-year Treasury bonds). Callable corporates and munis can shorten the expected life; that option is why some spreads are quoted option-adjusted. Level I awareness: a stated maturity is not always the cash-flow life.

Par (face) is the amount the coupon is calculated on and the amount due at a non-called maturity. Corporate face is often $1,000; quotes are still in percent of par, so you do not need the face to read 99.50.

How debt prices are expressed

Cash equities quote in currency per share. Bonds quote as a percentage of par.

A corporate quoted at 99.50 is 99.50% of par. On $1,000 face that is $995.00. A quote of 101.25 is a premium bond: $1,012.50 per $1,000. Decimals here are ordinary decimals, not 32nds.

U.S. Treasury notes and bonds still use an older fraction: 32nds of a point. The handle is percent of par; the two-digit tail is n/32.

Dealers may print the fraction after a dash, a colon, or a period. The skill is 16 means 16/32, not 16/100. A + after the 32nds is awareness-level: half of a 32nd. You will not need to grind 3/8 of a 32nd on a typical Level I stem. You will need to not read 99-16 as $99.16 per $1,000.

Treasury bills are the exception. They are discount instruments and are quoted on a discount yield, not a 32nds price. A bill quote of 3.90% is a yield convention, not 3.90% of par.

Quoted Treasury and corporate prices are typically clean prices (without accrued interest). The buyer pays the clean price plus accrued. Technicians plotting a bond-price series are usually plotting the clean quoted price or a futures price, not the invoice amount. Do not invent an accrued-interest calculation unless the stem gives it.

U.S. government debt, yields, and credit spreads

U.S. Treasury securities are the deepest, most liquid USD debt market. By market convention they are the risk-free benchmark for dollar rates: not because Treasuries cannot move, but because other USD issuers are priced as Treasuries plus a spread. When a corporate 10-year yields 5.70% and the 10-year Treasury yields 4.90%, the credit (yield) spread is 80 basis points (0.80 percentage points). One basis point is 0.01%.

Spread = yield of the credit risky bond − yield of a comparable-maturity (or duration) Treasury.

Comparable matters. A 10-year corporate versus the 2-year Treasury is not a clean credit spread; it mixes curve with credit. Option-adjusted spreads attempt to strip call risk out of callable paper. Level I should be able to define the simple yield spread and say what a wider spread means: the market is demanding more extra yield for that issuer's credit, liquidity, or structure. Spread widening is risk-off in credit. Spread tightening is the opposite.

Why this belongs on a technician's desk:

• Flight-to-quality: equity risk-off often coincides with Treasury prices up (yields down) and corporate spreads wider.
• Discount-rate pressure: rising Treasury yields, holding spreads constant, lower the present value of distant equity cash flows—one reason long-duration growth stocks can wobble when the 10-year backs up.
• Sector tells: banks care about curve shape (lending margin stories); utilities and REITs often trade like long-duration bond proxies.
• Risk appetite: a quiet equity index with blowing-out high-yield spreads is not a quiet credit tape.

Agency debt and high-grade corporates usually sit a modest spread over Treasuries. High-yield sits much wider, and that extra spread moves. Municipals can yield less than Treasuries on a nominal basis because of tax treatment; compare munis on a tax-equivalent basis if a stem goes there, or simply know they are not a raw Treasury plus credit story.

On-the-run Treasuries (the most recently auctioned maturity) are usually more liquid than off-the-run issues. Liquidity itself is a spread component. The next chapter's bond futures and Treasury ETFs are how many technicians chart this market; the cash facts in this unit are what those products are claiming to represent.

Defining the yield curve

The yield curve is a plot of yields against maturity for bonds of similar credit quality. The default picture is the U.S. Treasury curve: 1-month through 30-year constant-maturity yields published by the U.S. Treasury (the Daily Treasury Par Yield Curve Rates). Each point is a yield; the horizontal axis is time to maturity.

A common slope measure is 2s10s: the 10-year yield minus the 2-year yield, in basis points. A steepener is that gap widening; a flattener is it shrinking. Level I wants the definition and the shapes, not a live forecast. Do not treat an inversion as an automatic equity-sell signal on a multiple-choice stem. Treat it as regime information that belongs next to the equity tape, credit spreads, and internals.

Real curves also differ by coupon type (par curve versus zero curve) and by credit. A AAA municipal curve and a BB corporate curve are different objects. If the stem does not name the credit, it almost always means Treasuries.

Putting bonds on a Level I equity chart

You rarely need a single-CUSIP corporate to answer a CMT Level I item. You need the map:

1. Read price versus yield so a bond-future rally is a yield decline, not a mystery.
2. Name the issuer so you know whether you are looking at benchmark rates or credit.
3. Read the quote so 99-16 is 99.50% of par, not a stock price.
4. Put Treasury + spread under any non-government yield.
5. Put the curve's level and slope next to duration-sensitive equity sectors.

That is the whole unit. Futures on rates, ETPs that package bonds, and foreign-exchange crosses are the next chapter. Relative strength will use these series as ratio legs. Volatility analysis will treat rate vol as a different object from equity vol. Here, cash debt has to be defined before it can be compared.

Key Takeaways

• Fixed-coupon prices and yields move inversely; longer, lower-coupon bonds swing more
• Issuers: Treasury, agency/GSE, municipal, corporate, other sovereign
• Identity: issuer, coupon, maturity; quotes in percent of par
• Treasuries in 32nds (99-16 = 99.50); bills on discount yield
• Treasury curve is the USD benchmark; credit spread is extra yield; the yield curve plots yield versus maturity