[mech765]

When interest rates for new bonds go up, the value of existing bonds go down. This only ever matters if you intend to resell the bond. If you hold it to maturity, you will get the same payout as you agreed to. However, if you try to sell your old bond with 3 percent yield, when bond buyers can go grab a bond with a 5 percent yield, they will pay you a lower price.

[T-A]

> When interest rates for new bonds go up, the value of existing bonds go down.

I'm sure skybrian understands that. The question is why prices fell more recently than they did back in 1981, when Volcker pushed interest rates much higher.

Apart from the fact that the Fed sets short term interest rates, and bonds, being long term loans, do not necessarily go the same way, there is the pesky behavior of derivatives. If price (p) as a function of yield (y) goes as

p(y) ~ 1 / y

then its derivative, i.e. how much price will change in response to a change in yield is

dp/dy ~ -1 / y^2

which tells you that price will move faster at lower yields.

[skybrian]

Thanks! Not in a position to do anything more than eyeball it on my mobile phone, but it seems long-term bond prices started out much higher this time (very low interest rates), so they had further to drop.

[naveen99]

In a hyperinflation scenario, holding bonds to maturity isn’t going to help you.