Why do bond prices fall when yields rise?

Why price and yield move oppositely

Bond prices fall when yields rise because a bond’s market price equals the present value of its future coupon payments and final principal, discounted at the market yield required by investors. Aswath Damodaran of New York University Stern School of Business explains that the discount rate in the present-value calculation is the yield; when that rate increases, each future cash flow is divided by a larger number, producing a lower present value. The inverse mathematical relationship is the fundamental cause: yield is the market’s demanded return, and price adjusts so the fixed cash flows of an existing bond deliver that return.

Interest-rate sensitivity and duration

The extent of a bond’s price decline depends on its duration and convexity. Duration measures the weighted average timing of cash flows and approximates the percentage price change for a given change in yield. Frederic S. Mishkin of Columbia University notes that longer-duration bonds, such as long-term zero-coupon issues, are more sensitive to yield movements than short-term, high-coupon bonds because a larger portion of their value lies farther in the future and is therefore discounted more heavily when yields rise. Convexity captures the fact that the price-yield relation is curved; for large changes in yield, convexity adjusts the duration estimate and explains why long-term prices do not move linearly with yield.

Causes of rising yields

Yields rise for several reasons. Central banks tightening policy to combat inflation increase short-term interest rates and influence expectations of future rates, which lifts yields across the curve. Fiscal deficits and increased government borrowing can push market yields higher as supply expands and investors demand higher compensation. Credit-rating changes, liquidity shocks, and shifts in global capital flows also change the risk premium investors require. These mechanisms are discussed in central banking literature and in the policy analyses of financial economists such as Frederic S. Mishkin of Columbia University.

Consequences and broader impacts

When yields rise and bond prices fall, holders of existing bonds realize unrealized or realized losses if they sell before maturity. Institutional investors with large fixed-income allocations—pension funds, insurance companies, sovereign wealth funds—face balance-sheet effects that can prompt portfolio rebalancing, further influencing markets. For retirees dependent on coupon income, higher yields can eventually be beneficial for new purchases but painful for current bond values. In emerging and frontier markets, where currency and political risks are higher, rising global yields can trigger capital outflows, currency depreciation, and higher local borrowing costs, amplifying economic stress for households and governments. Environmental and long-term infrastructure projects are also affected because higher yields raise the discount rate used to evaluate future benefits, making long-term investments less economically attractive; this dynamic influences territorial planning and intergenerational decisions.

Understanding the inverse price-yield relationship, and the roles of duration, policy, and market structure, helps investors and policymakers anticipate and manage the financial and social consequences when yields move.