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When market interest rates rise, prices of existing fixed-rate bonds generally fall. New bonds offer higher yields, so an older bond’s fixed payments become less attractive unless its price drops. At that lower price, its yield to maturity for a new buyer generally rises.
Why rising rates usually push bond prices down
A fixed-rate bond promises scheduled interest payments, called coupons, based on its face value. Those payments do not automatically increase when market rates do. If newly issued bonds offer higher yields, buyers will generally pay less for an existing bond with a lower coupon. The lower purchase price improves the return available from its remaining payments and repayment of principal.
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The SEC Office of Investor Education and Advocacy describes the general rule this way: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.” Read the SEC bulletin.
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In an illustrative example published June 26, 2013, the SEC considers a Treasury bond with $1,000 face value, a 3% coupon, and an original 10-year maturity. After one year, market rates rise from 3% to 4%. With nine years remaining, the example shows the bond’s price falling to $925 and its yield to maturity rising from 3% to 4%.
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This is a worked example under those stated assumptions, not a current quote or a prediction that every bond will lose the same amount when rates rise by one percentage point.
How price, coupon and yield differ
- Coupon: The bond’s contractual interest payment, expressed as a rate of its face value. A fixed coupon does not change just because market rates change.
- Market price: What a buyer may pay for the bond in the market. It can be above or below face value.
- Yield to maturity: A measure of the return a buyer may receive by purchasing at the current price and holding until maturity, taking account of payment timing and the price paid. It assumes the promised payments are made.
For an existing fixed-rate bond, price and yield to maturity generally move in opposite directions: a lower price means a higher yield to maturity for a new buyer. The coupon itself has not risen.
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Which bonds are more sensitive to rising rates?
The size of a bond’s price change depends on its features and circumstances. When comparing otherwise similar bonds, two useful indicators are maturity and coupon.
Maturity
Longer-maturity bonds generally have more interest-rate risk than comparable shorter-maturity bonds because more of their payments are farther in the future. A rate change can therefore have a larger effect on the present value of those distant cash flows.
Coupon
All else equal, a lower-coupon bond generally is more sensitive to rising rates than a higher-coupon bond. The SEC compares otherwise similar bonds with 2% and 4% coupons and shows the 2% bond falling by a greater percentage when rates rise.
Issuer, credit and trading conditions
Interest-rate sensitivity comparisons assume other important features are alike. In practice, a bond’s price also reflects the issuer’s ability to make payments, how easily the bond can be traded, and the costs involved in a transaction. A bond that is difficult to sell may not trade at an apparent valuation, and a commission or broker markdown can reduce sale proceeds.
What if you sell, hold, or own a government-backed bond?
Selling before maturity
If rates have risen, selling before maturity may mean accepting less than face value or less than the price originally paid. The actual proceeds depend on the bond and the transaction, including any commission or broker markdown. A market-price loss becomes realized when the bond is sold.
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Holding to maturity
If the bond is held to maturity, the investor generally receives its face value and scheduled interest, subject to the issuer meeting its obligations and the bond’s terms. A decline in interim market value still matters if the investor needs to sell early or tracks a portfolio at current market prices.
Government backing
For U.S. government-backed bonds, the guarantee of timely interest and principal payment at maturity is not a promise that the bond can be sold at face value or at its original purchase price beforehand. The SEC explains this distinction in its bond-investing bulletin.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Other factors can move a bond’s price
Interest rates are only one influence. Investor.gov identifies credit or default risk, inflation risk, liquidity risk and call risk as relevant to corporate bonds. Supply and demand also matter: prices can fall when more investors want to sell than buy. A callable bond may be repaid early under its terms, limiting the time an investor can keep receiving its coupon.
These factors mean the general inverse relationship is not a precise forecast for an individual security. The SEC’s examples explain the mechanism; they do not establish a universal price change for a particular rate increase.
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Official resources
- SEC: Investor Bulletin: What Are Corporate Bonds?
- Investor.gov: Bonds
- Investor.gov: High-Yield Bonds
- Investor.gov: Investor Bulletin—Selling Bonds Before Maturity
- Investor.gov: Bond FAQs
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