Why bond prices move
When interest rates rise, the price of older bonds falls. The longer the bond, the further it falls.
An example
You own a ten-year bond paying 2% a year. Rates rise and new bonds pay 3%. Nobody will pay full price for your 2%, so its price falls until it earns about 3% for a new buyer: to roughly €91.50 for each €100.
Duration
Duration says how much a bond’s price moves when rates move one point. With a duration of 8, a rise of one percentage point cuts the price by about 8%. Longer bonds have longer duration.
2022
In 2022 the European Central Bank raised its rate from −0.5% to 2%. Long bonds that had paid almost nothing lost a fifth or more of their price in a year. Rates had been low so long that many had forgotten bonds can fall.
It works both ways
When rates fall, older bonds paying more become worth more, and long bonds rise most. That is why bonds have often helped when shares fell in a slowdown, though not when inflation was the problem, as in 2022.
Key takeaways
- Rates up, bond prices down; rates down, prices up.
- Duration tells you roughly how far: duration × the change in rates.
- Held to the end, price swings on the way do not change what you get.