When market interest rates rise, the price of an existing fixed-rate bond generally falls, and when rates fall, the price generally rises. This article explains why, using the United States Treasury market and the US Securities and Exchange Commission’s (SEC) own teaching examples, and shows how maturity changes the size of the effect.
What is a bond actually promising?
A bond is a loan. The investor lends money to a government or company, which promises to pay interest (the coupon) and to repay the face value on a set maturity date. Many bonds pay a fixed rate throughout their life, so the cash flows are known in advance.
That fixed promise is the key. The cash payments never change, but the going rate for lending money does. The SEC’s Office of Investor Education and Advocacy describes this in an Investor Bulletin: market interest rates and bond prices “move in opposite directions,” so when market rates rise, prices of fixed-rate bonds fall. The SEC calls this interest rate risk. The rest of this article describes US rules and markets unless stated otherwise, although the arithmetic applies to fixed-rate bonds anywhere, including UK gilts and euro-area government bonds.
Why does a rate rise push the price down?
Imagine you own a bond paying a 3% coupon. If new bonds of similar quality now pay 4%, nobody will pay full price for your 3% bond when they could buy the 4% one. The price of your bond has to drop until buying it offers a competitive return.
The SEC bulletin shows this with a 10-year Treasury bond that has a 3% coupon, $1,000 face value, and semi-annual payments. A year later, nine years remain on the bond. The SEC’s two scenarios are shown below, with an unchanged-rate row added for comparison:
| Market rate a year later | Price of the 3% bond | Yield to maturity for a new buyer |
|---|---|---|
| 2% (down one point) | $1,082 | 2% |
| 3% (unchanged) | $1,000 | 3% |
| 4% (up one point) | $925 | 4% |
Discounting the remaining coupons and the $1,000 principal at the new market rate reproduces both figures. A one-point rise cut the price by $75, or 7.5%. A one-point fall added $82, or 8.2%. The gain from a fall is slightly larger than the loss from a rise, which is a known feature of the math rather than a rounding error.
Does the price drop mean a permanent loss?
Not necessarily, and this is where the idea is often misunderstood. The SEC notes that if you intend to hold a bond to maturity, day-to-day price fluctuations may matter less, because you are still paid the stated interest and the face value at maturity, assuming the issuer does not default. The loss becomes real if you sell before maturity at the lower price.
The SEC also makes a point that surprises many people: the “seesaw effect” applies even to bonds guaranteed by the US government. The government guarantees timely interest and full principal at maturity, but, in the SEC’s words, it does not guarantee the market price of the bond if you sell before it matures. A Treasury bond has very low credit risk, yet it is not free of price risk.
There is also a flip side. Falling prices raise the yield for new buyers, and an investor who holds a bond fund sees coupons reinvested at the higher rates available. Whether that offsets the price decline depends on timing and how long the investor holds.
How much does maturity change the effect?
The SEC bulletin states that bonds with longer maturities generally carry higher interest rate risk than similar bonds with shorter maturities, and that long-term bonds generally offer higher coupons to compensate. It also states that, with all else equal, a bond with a lower coupon will fall more in price than one with a higher coupon when rates rise.
To see the size of the maturity effect, here is illustrative arithmetic, not an SEC figure. Assume a bond is issued at par ($1,000) with a 5.24% coupon, paid semi-annually. That coupon matches the 10-year Treasury yield published on FRED for October 1, 2026, used here purely as a round starting rate. Then market yields jump one percentage point.
| Years to maturity | Price if yields rise 1 point | Change | Price if yields fall 1 point | Change |
|---|---|---|---|---|
| 2 | $981 | about -1.9% | $1,019 | about +1.9% |
| 10 | $926 | about -7.4% | $1,081 | about +8.1% |
| 30 | $865 | about -13.5% | $1,169 | about +16.9% |
The pattern is the point: the same one-point move costs a two-year bond under 2% and a 30-year bond more than 13%. Prices are rounded to the nearest dollar. These are hypothetical bonds, not forecasts or real quotes.
What do current Treasury yields look like?
According to the Federal Reserve data republished by FRED (Federal Reserve Bank of St. Louis), as of October 1, 2026 the 10-year Treasury constant-maturity yield was 5.24%, and the 2-year yield was 4.78%. The 10-year yield had been 5.17% on September 25 and 5.29% on September 30. The 2-year yield moved from 4.81% on September 25 to 4.92% on September 28 and then fell to 4.78%.
Those daily swings are small in percentage-point terms, but the table above shows why they matter: a move of 0.12 points in the 10-year yield between September 25 and September 30 is enough to change the price of existing long bonds by a noticeable amount. FRED also reported the effective federal funds rate, the overnight rate between US banks, at 3.88% as of October 1, 2026, so yields on longer Treasuries sat above that overnight rate on that date. This article does not attempt to explain why, and nothing here is a forecast of where yields go next.
What is the market saying about inflation?
Bond yields are often described as a real return plus compensation for expected inflation, which is one reason rate expectations and inflation expectations are tightly linked. FRED’s 10-year breakeven inflation rate, which it describes as a measure of expected inflation derived from nominal and inflation-indexed 10-year Treasuries, was 2.36% as of October 2, 2026. Breakevens are market-implied estimates, not official forecasts, and they can be wrong. For a plain-language look at how the underlying statistic is built, see what inflation actually measures.
How does this change the way bonds fit in a portfolio?
Two lessons follow from the arithmetic. First, “safe” needs a qualifier. A Treasury is safe from default in a way a risky company bond is not, but its price can still fall materially if it is long-dated and rates rise. Second, the right question about a bond or bond fund is not only “what does it yield?” but “how sensitive is it to rate changes, and when might I need the money?”
This links directly to what diversification really means: holding bonds spreads risk across different drivers, but bonds and stocks can both fall at once if rates jump, so diversification reduces risk without removing it. It also connects to the broader point about why short-term volatility misleads: a falling price today is not the same thing as a failed investment over a full holding period. And because the central bank rate path feeds into all of this, why interest rates matter more than people assume is a useful companion read.
Which bond risks sit alongside rate risk?
Interest rate risk is one of several. Credit risk is the chance the issuer fails to pay; corporate and high-yield bonds carry more of it than Treasuries. Inflation risk is that fixed payments buy less if prices rise faster than expected. The SEC’s separate Investor Bulletin on corporate bonds covers terminology such as coupon, face value, and yield to maturity in more depth. Bond funds add their own wrinkle, since a fund has no single maturity date and its holdings constantly turn over, so its price never “pulls to par” the way a single held bond does.
Reading a rate move with clearer eyes
The mechanism is simple: a fixed coupon is worth more when new bonds pay less and worth less when new bonds pay more. What varies is the size of the effect, and that depends mainly on maturity and coupon. Knowing this turns a headline about “bond market losses” from something mysterious into something you can reason about, including whether a given loss is realized or only on paper.
This article is general information, not personalised financial advice. Rules, yields and rates change, and past market behavior does not predict future results.
Sources: SEC; FRED
