You may occasionally hear “talking heads” on the news discuss the bond market, but too often, these news reports use confusing language and obscure terms.
Many important drivers affect the bond market, and one key concept that every investor should understand is the relationship between bond prices and interest rates.
Typically, when interest rates go up, bond rates go down, Likewise, when interest rates go down, bond rates go up. In 2020, interest rates dropped dramatically as the economy slowed. Many bondholders saw the value of their existing bonds increase as policymakers guided interest rates lower.1
What’s next for bonds? That’s anybody’s guess, but for bondholders, interest rate risk always exists, as the potential for investment losses due to a change in interest rates.2
If you ever want a refresher on the relationship between bond prices and interest rates, please don’t hesitate to call. We'd be happy to help.
1. CNBC.com, October 21, 2020
If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity investors will receive the interest payments due, plus their original principal, barring default by the issuer.