Why do yields and prices move in opposite directions?

An old bond competes against new ones

When interest rates rise, the price of bonds already in circulation falls, and vice versa. Why? New bonds offer a higher interest rate, so an old low-interest bond is less attractive. Its price falls until its yield to maturity matches the market.

A seesaw: the longer it is, the bigger the swing

How much does the price fall? That depends on the time to maturity. The longer the bond, the bigger the drop, because you have to put up with the low interest rate for longer.

Think of a seesaw: short bonds swing a little, long bonds a lot. This sensitivity is measured by duration, which is covered in more detail in lesson 05.

Why this surprises investors

This duration effect is the reason even a “safe” long-term bond fund can make painful losses when interest rates are rising. Many people buy a bond fund precisely because they are looking for safety, and are surprised when its value falls.

The logic works in the other direction too: when interest rates fall, the value of long bonds rises sharply. This is not a flaw but a mechanism that keeps the yields of all bonds in line with each other.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.