The Inverse Relationship Between Bond Prices and Interest Rates
You've heard 'when rates rise, bonds lose money,' but it's confusing why, right? Bond prices and rates move in opposite directions, like a seesaw. Let's find out why.
It moves like a seesaw
Bond prices and market rates are inversely related. That is, when rates rise, the prices of already-issued bonds fall, and when rates fall, bond prices rise. It's just like the two ends of a seesaw.
At first this feels strange. 'It pays more interest, so why does the price fall?' you might ask. The key lies in comparing 'already-issued bonds' with 'newly issued bonds.'
Why it happens: competition with new bonds
Let's take an example. Suppose I hold a bond paying 3% interest a year, and market rates rise so that newly issued bonds pay 5% a year.
Now no one wants to buy my 3% bond at its original price. Why buy the 3% bond at full price when there's a 5% bond right next to it?
So to sell my bond, I have to discount it. The price is lowered enough that whoever buys it cheaply ends up with a return similar to the 5% bond. That's how a rate increase makes existing bond prices fall.
Conversely, when market rates fall, my 3% bond becomes relatively attractive and its price rises.
How much will it fall: duration
So when rates rise by 1 percentage point, how much does a bond's price fall? The metric that gauges this is duration.
Duration is a number (in years) that roughly tells you 'how many percent the price changes when rates move by 1 percentage point.' For example, a bond with a duration of 7 falls about 7% when rates rise 1 percentage point and rises about 7% when they fall 1 percentage point.
So the longer the maturity (the larger the duration), the more the price swings for the same rate change. That's why long-term bonds are more sensitive to rate changes than short-term bonds.
Duration is an 'approximation' for small rate changes. When rates move a lot, there's an error between it and the actual price change, and the concept that corrects this error is convexity. (Source: Fidelity, Raymond James)
よくある質問
Q. I heard bonds are safe assets, so why do they lose money?
If you hold a bond to maturity, you receive the promised interest and principal (unless the issuer defaults), but if you sell before maturity, you have to sell at the market price at that time. If rates have risen, the price will have fallen, so you can take a loss. In fact, during periods when rates surged, long-term bonds and bond funds have suffered large valuation losses. 'Safe asset' does not mean 'no losses.'
Q. So should I not buy bonds when rates are rising?
You can't conclude 'don't buy.' Bonds newly issued after rates have risen pay correspondingly higher interest. What matters, though, is understanding that the low-rate bonds you already hold may be pushed down in price. Precisely calling the future direction of rates is hard even for experts, so it's safer to use this concept as a tool for understanding risk rather than as a prediction tool.
関連ページ
📋 結果は過去のデータに基づくものです。過去のリターンは将来のリターンを保証しません。
📋 本サービスは投資アドバイスではなく、投資を理解するための教育目的で提供されています。