Why do bond prices fall when rates rise?

This is the single most counterintuitive fact in finance for newcomers — and after five minutes it will feel obvious forever.

The seesaw, in one story

You buy a freshly issued government bond: €1,000 face value, paying a fixed 3% coupon — €30 a year. A year later, rates have risen and NEW bonds of the same kind pay 5% — €50 a year.

Now try selling your 3% bond. Nobody will pay €1,000 for €30 a year when €1,000 buys €50 a year next door. To find a buyer, you must cut the price until your fixed €30 coupon works out to a competitive yield for the new owner. Your bond didn't change — the world around it did.

That's the whole seesaw: rates up → existing bond prices down. Rates down → existing bond prices up. Always, mechanically, no exceptions.

Distance amplifies the swing

How MUCH a bond's price swings depends mostly on how long it has left to live. A bond maturing next year returns your €1,000 soon — little damage. A bond maturing in 2050 locks you into the old coupon for decades — its price must move far to compensate. Professionals measure this sensitivity as duration; for now, remember the intuition: longer bond, bigger seesaw.

Watch it in real prices — a fund holding 20+ year government bonds through the sharpest rate-hiking cycle in four decades:

That long slide through 2022 is the seesaw doing exactly what this lesson says — "safe" long bonds lost roughly a third of their price as rates surged. Safe from default is not safe from rates.

The size of that slide is not a mystery either; it has a formula you can run in your head. A bond's price falls by roughly its duration times the rise in yield, in percentage points — and rises by the same rule when yields fall. Strictly the measure is modified duration, and a fund reports an effective one for its whole portfolio, but the arithmetic is the same. The fund on the chart carried a duration around sixteen, and the twenty-year yield rose by about two and a half percentage points over that stretch: 16 × 2.5 ≈ 40% down is the first-order estimate. The actual fall was nearer a third, because the seesaw bends a little in the bond's favour as yields climb — a refinement called convexity that the estimate ignores. For a two-year bond, duration under two, the same shock costs about 5%.

Try it now

1. Explain the seesaw to an imaginary friend using the €30-vs-€50 story — out loud, ninety seconds.
2. Two bonds, same government: one matures in 2 years, one in 30. Rates jump 2% overnight. Which price falls more, and why?
3. Measure January to October 2022 on the chart above and check the sentence beside it. "Roughly a third" is a claim, and you can now hold it to two decimal places.
4. Then put the short end next to it. Same borrower, same certainty of repayment, bills that mature in weeks rather than decades:

Measure the identical window here. Write both percentages down: one of them is a catastrophe and the other is a rounding error, and the entire difference between them is distance — the amplifier this lesson opened with, priced by the market in front of you. 5. Update your vocabulary: "bonds are safe" becomes "bonds are safe from ___ but not from ___." Your two percentages have just filled in both blanks.