Asset prices
Every asset has a price. When you buy a house or a car, you pay a price for it. Some time later, the same thing you paid "X" for is worth something else. It may be more or less, but it will hardly ever be exactly what you paid, right?
We rarely do this exercise, but if we estimated the sale price of anything we own, we would get a different price every day. That happens because demand for the asset changes. It rises or falls as time goes by, when a new model comes out, when the industry runs short of supply, and so on.
The same happens with government bonds. The difference is that assets like cars and houses are unique and full of specific features. Think of the number of bedrooms, the location and the condition of your house. Now think of the mileage, the options and the other details that make your car unique. No other car or house is exactly like yours. That makes these assets harder to price, and their pricing follows a somewhat different logic.
Standardized assets
Now think of a bond from Tesouro Direto, the Brazilian government's retail bond program, that you bought some time ago. Any other bond with the same maturity held by another investor is exactly the same. All bonds with the same features (maturity and index) are identical. It is like a BRL 10 bill: whatever its condition, it is worth the same in your pocket or in someone else's.
Beyond standardization, these are financial assets, so pricing them comes down almost entirely to financial math, which software or spreadsheets can do automatically. All of this makes it much easier to have real-time quotes to buy or sell the bonds.
So pricing financial assets is relatively simple, and the price of every asset changes daily with supply and demand. But why update the price every day?
Mark-to-market (MtM)
Mark-to-market (MtM) is an accounting concept. Companies, investment funds and other institutions use it worldwide to report the fair value of their assets to investors and shareholders. In Brazil, its adoption is tied to the 2002 crisis, but I will not get into that here.
For us, the reason for marking to market is simple: it shows what your bonds are worth if, and I want to stress this, only IF you decide to sell them at that moment.
Marking to the curve
What if I do NOT sell my bond? Simple: your investment keeps earning the interest rate you locked in when you bought it. Say you bought an LTN (Tesouro Prefixado), a fixed-rate zero-coupon government bond, at 10% a year. It does not matter what the bond is worth one day, one week or one month after you bought it. If you hold it to maturity, it will pay the 10% you locked in at the start.
Back to the corporate example: many companies and financial institutions apply the HTM (hold to maturity) concept, which simply means declaring that they do not intend to sell the asset before it matures. In that case, they value it with a different method: marking it to the bond's curve. They ignore the market price and update the bond's value daily at the rate agreed at purchase.
Some brokers and banks let you see your holdings both at market value (MtM) and at the curve (HTM), but the rule for official financial statements is to always mark to market.
Price changes
Financial markets constantly adjust their expectations for the economy. With every statement by a major politician and every new economic data release, the market changes its view of where the US dollar exchange rate will be or how interest rates will behave.
Because government bonds mature in the future, their prices carry a dose of expectation about what will happen to the economy down the road. That expectation brings some uncertainty, which keeps prices moving. The only certainty about any market forecast is that it can change.
That is why it pays to plan carefully and choose how and where to invest your money to reach your goals faster. If you want to avoid the effect described above, the Brazilian National Treasury (Tesouro Nacional) offers bonds that practically eliminate the MtM effect. You just need to know which ones and how to invest in them. More on that in a future post.