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Why bond prices fall when yields rise
· Concept
Fact, law or dataA rule, statute, definition or measured number.
A bond's coupon is fixed, so when market rates rise, existing bonds must fall in price to offer buyers the new, higher yield.
See it on the Money & Finance map →How it works
Take a $1,000 10-year bond paying 3%, or $30 a year. If new 10-year bonds pay 5%, no one pays $1,000 for $30 a year; the old bond's price drops to about $845, where its payments plus the gain to $1,000 at maturity equal a 5% return. When rates fall, prices rise. Longer bonds swing more (see Duration). In 2022 the broad US bond index lost about 13%, its worst year on record.
Why it matters
It is the main risk in bond funds and bank balance sheets: SVB failed in 2023 after rising rates cut the value of its long bonds.
Think of it like
Like a building locked into below-market leases: when market rents rise, buyers pay less for its fixed income stream.
Facts, rules and data
Standard present-value math; Bloomberg US Aggregate index data for 2022; SVB's 2022 annual report showed about $15 billion of unrealized losses on held-to-maturity bonds.
Inside this (1)
Connections (3)
▸Why bond prices fall when yields rise explains the bond losses behind Silicon Valley Bank collapse (2023)Fact, law or data
The connection
SVB bought long-term bonds yielding under 2% in 2020–21. When the Fed raised rates in 2022, new bonds paid 4% or more, so SVB's older bonds lost market value, about $15 billion on those held to maturity. Accounting let it carry them at cost until it had to sell.
When and why
SVB's balance sheet, 2021–2023; the losses appeared in the footnotes of its 2022 annual report.
How we know
SVB's own filings and the Fed's review show the unrealized losses; the math is standard bond pricing.
Debates and risks
Why the bank and its supervisors ignored such plain interest-rate risk, and whether held-to-maturity accounting hides it, are debated.
▸Why bond prices fall when yields rise governs the price of Bonds: lending money in exchange for interestFact, law or data
The connection
A bond's price is whatever makes its fixed payments earn the current market yield. When yields rise, the price must fall; when yields fall, it rises. The size of the swing grows with time to maturity (see Duration): a 30-year bond can move 15% or more on a 1-point rate change.
When and why
Present-value math is centuries old; Frederick Macaulay defined duration in 1938. The 2022 rate jump gave a vivid test.
How we know
Pure arithmetic, confirmed daily in market prices; long-term Treasury bond funds fell about 30% in 2022.
Debates and risks
The math is settled. The open question is behavioral: why banks like SVB and many investors underestimated rate risk after a decade of low rates.
▸Duration: how sensitive a bond is to rates measures the size of Why bond prices fall when yields riseFact, law or data
The connection
The price-yield rule says bond prices fall when yields rise; duration says by how much. A bond is worth its payments discounted to today, and a rate rise shrinks distant payments most. Duration is the value-weighted average wait for those payments, so it roughly equals the percentage price change per 1-point yield move.
When and why
Frederick Macaulay defined duration in 1938; John Hicks reached a similar measure in 1939. Bond traders worldwide use it daily.
How we know
It follows from the math of discounting fixed payments. In 2022 long Treasuries lost about 30% as yields rose about 2 points, close to the prediction.
Debates and risks
For bonds with options, such as callable or mortgage bonds, 'effective' duration comes from models of borrower behavior, so different firms can report different numbers for the same bond.