Bonds & rates

Definition

Bonds are dated claims on fixed cash flows — the market where TIME and CREDIT are priced directly. For the platform’s equity-and-derivatives center of gravity, the bond market serves three roles: the DISCOUNT-RATE source every valuation imports (regime-rate-environments), the classic diversifying asset with its regime-conditional hedge property, and a tradeable complex in its own right (Treasury futures, bond ETFs) with mechanics this entry anchors.

How it works / structure

• Price-yield mechanics: price and yield move inversely; DURATION measures the sensitivity (a 7-duration bond loses ~7% per 100bp yield rise); CONVEXITY bends the line favorably for the holder; the coupon/maturity structure sets both. These are arithmetic, not opinions.
• The curve: yields by maturity — level, slope, and curvature summarize it; slope inversions are the documented recession correlate with undependable lead times (regime-rate-environments); the curve decomposes into expected policy path + term premium (the decomposition is model-dependent — quoted as such).
• The credit stack: Treasuries (the risk-free benchmark), investment grade, high yield — spreads over Treasuries price default risk and risk appetite; high-yield spreads function as an equity-correlated stress gauge (documented co-movement with equity drawdowns).
• Instruments (engine-accessible): Treasury futures (instrument-treasury-futures — the platform’s primary rate expression), bond ETFs (constant-maturity ladders — an ETF never “matures”; its duration is perpetual — the behavioral difference from holding a bond), TIPS (CPI-indexed principal — the breakeven read, macro-inflation-linkages).

When it applies

Portfolio construction (the hedge asset’s regime conditionality is THE allocation question — port-allocation-frameworks); rate theses (curve shape, policy path — event-fomc); credit-spread reads as cross-asset confirmation; yield-alternative competition (rate levels reprice equity income strategies — strategy-dividend-income, instrument-preferred-stock).

Risk profile & failure modes

• Duration surprise in “safe” funds: long-duration bond ETFs drew equity-scale drawdowns in 2022 (−30%+ in 20-year-Treasury funds) — “bonds are safe” conflates credit safety with price safety.
• The hedge-regime flip: the negative stock-bond correlation is regime-conditional (regime-rate-environments — the 2022 exhibit); hedging equity with duration is an inflation-regime thesis, stated or not.
• ETF-vs-bond confusion: a bond held to maturity returns par (absent default); a constant-duration ETF marks to market forever — different objects for different theses.
• Credit-liquidity illusion: corporate bond liquidity evaporates in stress; ETF wrappers trade through their NAVs in dislocations (March 2020, documented — instrument-etf mechanics).

Evidence & limits

Instrument mechanics are Treasury/SEC-documented; duration arithmetic is mathematics; the curve-inversion correlation and stock-bond regime dependence carry the citations in regime-rate-environments. Term-premium decompositions are model-dependent estimates (Fed-published models exist) — labeled as models.

Falsifiable-thesis examples

Illustrations only, not signals:

• “The 2s10s curve will un-invert via front-end declines (cut-driven steepening) within two quarters” — falsified by the curve decomposition.
• “High-yield spreads will widen past 500bp before the index enters a 10% drawdown (credit-leads-equity thesis)” — falsified by the sequence.

Cross-references

• The tradeable form: instrument-treasury-futures; the regime frame: regime-rate-environments
• The inflation-indexed read: macro-inflation-linkages (TIPS breakevens)
• The competition channel: strategy-dividend-income, instrument-preferred-stock
• The allocation question: port-allocation-frameworks