Interest rates and bond markets are tightly linked: when interest rates move, bond prices, yields, and investor experience all shift, sometimes in ways that can surprise clients. A clear framework can help clients understand what is happening in their fixed income allocation and why we sometimes recommend adjustments.
The basics: prices and yields
Bond prices and interest rates move in opposite directions. When prevailing rates rise, newly issued bonds come with higher coupons, so existing bonds with lower coupons must fall in price to offer a competitive yield. When rates fall, older, higher-coupon bonds become more valuable and rise in price. For the investor this means “losses” in a bond fund during rising-rate periods are usually market-to-market declines and not missed interest payments.
Duration, time horizon, and volatility
The key measure of interest-rate sensitivity is duration, which estimates how much a bond or bond fund’s price may move for a 1% change in yield. Longer-maturity, lower- coupon bonds typically have higher durations and therefore experience larger price swings when rates move. Short-term bonds see a more modest move and can be reinvested at new rates quicker. This is why shorter duration is a common way to reduce volatility in a rising interest-rate environment. If you are a long-term investor, accepting some near-term volatility could be worthwhile, because higher yields today can improve expected returns over a full cycle.
Credit risk, inflation, and strategy
Interest-rate moves are rarely isolated; they often reflect changing inflation and growth expectations. When rates rise because the economy is strong, credit spreads can narrow as default risk appears lower, partially offsetting the price declines for corporate and high-yield bonds.
At Meikle Financial Group we try to frame these trade-offs in terms of cash flows, time horizon, and risk, that helps our clients see rising or falling rates, not as threats, but as normal parts of the bond market cycle that can be actively managed.
