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Why Do Bond Prices Fall When Interest Rates Rise?

Why Do Bond Prices Fall When Interest Rates Rise?

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Bonds can pay exactly what they promised and still lose value. That’s the part most investors miss, and it’s why this conversation matters if you’re retired, nearing retirement, or trying to make sense of a bond market that suddenly feels less predictable. Jag is joined by Alex Cabot and Ed Lambert of Birch Run Financial to unpack the real relationship between interest rates and bond prices, including why rising rates push existing bond values down, why falling rates can make them more valuable, and why the bond you own is not the same as the bond fund you buy.If 2022 left you wondering how both stocks and bonds could fall at the same time, this episode puts that year in plain English. Alex breaks down the mechanics with simple examples, from coupon vs. yield to premium and discount pricing, yield to maturity, and duration, the measure that helps explain why long-term bonds react more dramatically than short-term ones. He also draws a sharp line between interest rate risk and credit risk, so you can tell the difference between a bond dropping because rates changed and a bond dropping because the borrower is in trouble.Ed brings the lesson home with the real-world impact from 2022, when the Bloomberg Aggregate Bond Index lost about 13% as the Fed raced from near zero to roughly 4.5%. He explains why that selloff shocked so many investors, how rising rates affect both current portfolio values and future reinvestment rates, and when individual bonds may make more sense than bond funds for specific goals like funding a tuition bill or matching a future expense.You’ll also hear how to think about credit quality, duration, liquidity, taxes, and time horizon when building a fixed-income allocation, plus why the right bond strategy is less about predicting rates and more about understanding what you own and why you own it.Essential listening if you want bond investing to feel a lot less mysterious and a lot more usable in your financial plan.(00:00) Intro (02:39) Why bond prices can fluctuate even though bonds are conservative(05:33) Bonds sold at a premium when rates fall(06:29) Coupon versus yield explained(07:55) Yield to maturity and why it differs from coupon rate(09:46) Duration as a practical measure of interest rate risk(11:40) Interest rate risk versus credit risk(15:40) Why 2022 shocked bond investors(18:03) Why stocks and bonds both fell in the same year(19:58) Individual bonds versus bond funds and ETFs(22:22) Higher rates improve future bond income(25:05) Why retirees use bonds and cash for spending stability(26:05) Why not all bonds behave the same(27:25) The interest payment and market value are different You can always email Alex and Ed at info@birchrunfinancial.com or give them a call at 484-395-2190.Or visit them on the web at https://www.birchrunfinancial.com/Alex and Ed's Book: Mastering The Money Mind: https://www.amazon.com/Mastering-Money-Mind-Thinking-Personal/dp/1544530536Any opinions are those of Ed Lambert Alex Cabot, financial advisors, RJFS, and Jon Gay, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The examples throughout this material are for illustrative purposes only. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Diversification and asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future returns. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and fixed income prices. Generally, ...
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