Existing bond prices have been falling as US Treasury yields have climbed in recent months. Trading Economics put the US 10-year Treasury yield at 5.12% on 20 October 2026, down 0.02 percentage points from the previous session. yourbestsavings reported 5.15% on 19 October. CNBC reported in early October that the 10-year had risen 60 basis points since the end of July and had backed off a 24-year high. The sources disagree on the exact level, so check official Treasury yield data before relying on any single figure.
The mechanism itself is not new. What has changed is the backdrop: yields have moved up, so people holding bonds issued at lower coupons are seeing the market value of those holdings drop. For the policy-to-borrowing channel behind these moves, see how interest rate decisions affect mortgage and loan rates.
Why do bond prices fall when yields rise? A fixed coupon forces the adjustment
A bond's coupon and face value are set when it is issued. They do not change afterwards. When market interest rates rise, newly issued bonds pay higher coupons, which makes an older bond paying a lower fixed coupon less attractive. The only thing left to adjust is the price a buyer pays. The price falls until the bond's yield matches what current market rates offer.
The St. Louis Fed makes the same point in its November 2023 explainer: when market rates rise above an existing bond's coupon rate, the bond's market value falls below its face value. FINRA states the inverse relationship directly: as price rises, yield falls, and as price falls, yield rises.
A worked example: the same bond before and after a price fall
Arlingclose uses a £100 face value bond with a 5% coupon, which pays £5 a year. Suppose its price falls to £95.
- A buyer at £95 still receives the £5 annual coupon.
- At maturity the bond repays £100, so the buyer gains £5 on top of the coupons.
- Current yield, the annual coupon divided by price, rises from 5% at par to £5 ÷ £95, or about 5.26%. That last figure is our arithmetic on Arlingclose's numbers, not a figure the source states.
Because the buyer's total return on the £95 purchase is higher than the coupon alone, yield to maturity rises too. The example assumes the bond is held to maturity. If the holder sells before then at the lower price, the loss becomes real.
Yield and current yield: which number moves
In headlines, yield usually means yield to maturity, the total return if the bond is held until repayment. The coupon does not move; the yield does, because the price changes. Current yield is simpler: the annual interest payment divided by the market price. Wikipedia's current yield entry summarises an SEC definition. We have not checked the SEC document itself, so cite it directly if you need the formal wording. Both measures rise when the price falls, but they are different numbers and can diverge noticeably.
Why maturity and coupon change how much a price moves
Long-maturity, low-coupon bonds are the most sensitive to rate changes, according to Fidelity's duration explainer. Traders use duration to estimate that sensitivity. SEIC offers a rule of thumb: for each 1% change in rates, a bond's price moves by roughly 1% in the opposite direction for each year of duration. On that approximation, a bond with a duration of ten years would move by roughly 10% for a one-point change in rates. Treat this as a rough estimate for small moves, not an exact figure.
Financial Edge notes the limits. Duration is a linear estimate, and it assumes the whole yield curve shifts in parallel. Real curves often do not, so the estimate becomes less accurate for large moves.
When the rule bends: exceptions and bond funds
The inverse relationship describes standard fixed-rate bonds. It is not a mathematical certainty across every product. Credit spreads can move a bond's yield even when the risk-free rate is unchanged. Callable bonds carry an embedded option, so their price behaviour shifts as the call becomes more or less likely, and effective duration is used for them rather than modified duration. Floating-rate notes reset their coupons, and inflation-linked bonds adjust their payments, so both respond differently to rate moves.
Bond funds raise a separate issue. A fund has no maturity date, so the hold-to-maturity logic in the worked example does not apply directly. A fund's price reflects the current market values of the bonds it holds and does not return to face value on a set date.
What this means for bondholders
For a vanilla bond held to maturity, the paper loss from a rate rise narrows as the bond approaches repayment at par. The loss becomes permanent only if the bond is sold at the lower price. Before acting on any bond, check the date and source of every yield figure you rely on. FINRA's guide, Understanding Bond Yield and Return, explains the terms, and the St. Louis Fed's educational explainers cover the same mechanism. This article is general information, not personal financial advice.