Curves, duration, credit and real yields

frameworkPublished 16 October 20261 min readbonds, macro

Key points

• Policy rates, long yields and term premium are different objects.
• Longer duration means a larger price response to a yield change.
• Credit spreads can widen even when government yields fall.

What is going on

A central-bank policy rate is a short-term administered rate. A long government yield also contains expected future policy and a term premium. The BIS and the IMF discuss these pieces because financial conditions depend on the whole path, not on the latest decision alone. Credit spreads sit on top of government yields and compensate for default and liquidity risk that a government bond in the same currency may not carry.

Why it matters

Duration is the reason a small yield change can matter more for a long bond than for a bill. Inflation matters because a nominal yield is not a real yield: expected inflation and an inflation-risk premium sit inside the nominal number. Fiscal issuance can lift the term premium even when the policy rate is unchanged. These are mechanisms. They are not a statement of where yields are today.

What to watch

Central-bank statements for the policy stance, debt-management offices for the auction calendar, and inflation releases for the real-yield question. A steepening or flattening of the curve is a description of two yields, not a forecast. Credit spreads should be read beside default and liquidity news, not as a mood score.

Risks

Falling yields help the price of existing high-quality bonds and can signal weaker growth. Rising yields do the reverse and can still coincide with strong nominal profits. Spread widening can hurt credit even in a rally for government bonds. Each scenario has a limit, which the bonds section states.