OCT · ISSUE 40 · October 3, 2026

CONCEPT

Why a bond's price falls when its yield rises

The rule that confuses almost every beginner in fixed income.

IF RATES RISE

price ↓

the bond is worth less

IF RATES FALL

price ↑

the bond is worth more

RELATIONSHIP

inverse

always, by math

THE IDEA

Seesaw

price and yield, on opposite sides

A bond pays a fixed coupon. If market interest rates rise, that fixed coupon looks small, so the bond's price drops until its yield matches the market. That is why price and yield always move in opposite directions.

EXAMPLE

TO SEE IT

-8%

a 10-year bond's price if rates rise +1%

The coupon has not changed, but the price has. No one pays full price for an old 4% bond when new ones pay 5%, unless you discount it.

Illustrative example: if rates rise by 1 point, a 10-year bond can lose roughly 8% of its price. The longer the maturity, the bigger the drop.

DURATION: — How sensitive a bond's price is to changes in rates.
POINT: — 1 percentage point = 100 basis points = 1.00%.

THE RULE

SIMPLE RULE

Two sides of the same coin

“No bond rises in price and yield at the same time. They are two sides of the same coin: when the market wants more yield, the price falls to give it to you.”

Ronfy Analysis · Fixed income concept

Understand this one sentence and you understand 80% of fixed income.

PRICE: — What you pay for the bond in the market today.
MARKET: — The buyers and sellers who together set the price.

VISUAL

THE SEESAW

The more yield the market wants, the less the bond is worth

3%4%5%6%7%

The same relationship, every time: more yield demanded means a lower price. That is why a rate rise punishes bonds already issued.

Illustrative curve: the axis is the yield the market demands, the line is the bond's price. One goes up, the other goes down.

PAR: — The bond's face value (100). Above it trades at a premium, below at a discount.
DISCOUNT: — Buying a bond below its face value.

WHAT IT MEANS

IMPLICATIONS

Four things that follow from this rule

RISING RATES PUNISH WHAT IS ALREADY OUT
The bonds already in your portfolio, with their old fixed coupon, lose price when new bonds come out paying more. They have not changed, but they are worth less.
LONGER MATURITY, BIGGER DROP
A 2-year bond barely moves with rates. A 30-year bond can fall hard. That is duration: the further out you get paid, the more a rate rise hurts.
HIGH RATES = LOCKED-IN YIELD
The upside: if you buy when rates are high, you lock in that yield for years. Today's bad news is tomorrow's opportunity.
THAT IS WHY BOND FUNDS FALL
A bond fund is a basket of bonds. When rates rise, the value of that basket falls, even though it keeps paying its coupons right on schedule.

The seesaw is not theory: it explains why your bond fund moves the way it does.

DURATION: — Measures how far the price falls per rate rise. The longer the maturity, the greater.
BOND FUND: — A vehicle that invests in a diversified portfolio of bonds.
FIXED COUPON: — Interest that does not change over the life of the bond.

BREAKDOWN

WHAT MOVES PRICE

What really moves a bond's price

INTEREST RATESThe dominant factor: the seesaw in this lesson60%

MATURITY / DURATIONAmplifies the effect of rates25%

CREDIT RISKThe chance the issuer defaults15%

People talk a lot about default risk, but what moves an ordinary bond's price most is interest rates.

Illustrative split. Interest rates are, by far, the factor that weighs the most.

CREDIT RISK: — The chance that whoever issued the bond fails to pay.
ISSUER: — Whoever issues the debt: a government or a company.

EXAMPLE

5 ILLUSTRATIVE ETFs

How this lines up in real bond ETFs

BIL	~100	→ steady	1-3 month bills. Barely moves with rates: minimal duration. Illustrative.
SHY	~82	→ slight	1-3 year bonds. Low sensitivity to rates. Illustrative.
IEF	~95	▼ falls	7-10 year bonds. Medium duration: falls more when rates rise. Illustrative.
TLT	~88	▼ sharp	20+ year bonds. Maximum duration: the one that suffers most in a rate rise. Illustrative.
TIP	~108	→ mixed	Inflation-linked bonds. They hedge CPI, but still carry duration. Illustrative.

Rounded, illustrative prices only. The idea: the longer the maturity, the more the ETF moves when rates change.

ETF: — A listed basket that tracks a group of bonds or stocks.
DURATION: — The longer the bond's maturity, the more its price falls when rates rise.
BILLS: — Very short-term Treasury debt (under 1 year).

Does the seesaw make sense now?

If you finally see why bonds fall when rates rise, share it with anyone who still gets tangled up.

One concept on the weekend, the market every day. The daily briefing is back Monday.

Daily briefing · Mon-Fri 16:00 ET

YIELD: — What you earn per year based on the price you pay for the bond.
DURATION: — How far a bond's price falls when rates rise.

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