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What Happens to Bonds When Interest Rates Start Rising?

Bonds and interest rates are closely related, but in which direction?

By Andrew Moran

Edited by Joel Taylor

Published January 14, 2024

A trader placing blocks on top of a table that reads "Bonds" with growing interest rates next to a calculator and stock charts

﻿Bonds are a multi-trillion-dollar market that consists of lending money to a government or a company for a pre-determined length of time in exchange for interest payments. Once they reach their maturity date, the bond issuer returns the investor's money.
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What Happens to Bonds When Interest Rates Change?Now, for newcomers, it might be a tad confusing. Bond prices and interest rates maintain an inverse relationship.
So, when interest rates rise, the prices of bonds fall. When rates fall, bond prices increase. This occurs because when new bonds are issued with higher rates, existing low-rate bonds become less appealing to investors. 
﻿If an investor trades the bond before maturity (the date of bond repayment, which can be as little as one day to as long as 30 years), then there could be a potential profit.﻿
﻿Should You Trade Bonds When Interest Rates Are High or Low?﻿﻿
﻿﻿Because bond prices trade countercyclical, investors may think about taking these debt securities when the economy is booming, as bullish conditions will send prices lower.﻿
» Investing in tech stocks? Learn why tech stocks fall when interest rates rise﻿