Bond prices: why a perfectly safe loan still loses money when rates rise

The question nobody quite answers

Bonds get sold as the calm half of your savings. Then a statement arrives showing the calm half went down.

Nothing defaulted. Nobody missed a payment. The money will be repaid in full, on the agreed day.

So where did it go?

What a bond actually is

A bond is a loan you make, written down. You hand over a sum. The borrower promises a fixed interest payment on set dates, then returns your money on a named day [2].

That interest payment is called the coupon. It is a fixed number of dollars, set the day the bond is issued, and it never changes [3]. The named day is the maturity date [2].

Governments borrow this way, and so do companies [4]. America’s are called Treasuries. Britain’s are gilts, and Japan’s are JGBs [5].

One number is locked, so another has to move

Here is the whole mechanism.

Say you lent $10,000 and collect $400 a year. That was a fair deal when new loans also paid 4%.

Now new loans pay 6%. A fresh lender putting up $10,000 collects $600 a year. You still collect $400 [1].

Your contract cannot adjust. The $400 is fixed, and so is the day your $10,000 comes back [3].

So if you want out early, something has to give. The only number left that can move is what a buyer will pay you [1].

Nobody pays $10,000 for a $400 income when $10,000 buys $600 elsewhere. They pay less - little enough that $400 a year works out to 6% on their smaller outlay [6].

That is it. Lock the payments, and every change in the world arrives through the price.

The numbers, worked through

The cleanest version is a bond that pays no interest at all, just a lump at the end.

Say it trades at $950 and pays $1,000 in a year. That is a return of 5.26%, because $50 divided by $950 is 5.26% [1].

Now new bonds start yielding 10%. Nobody pays $950 for your 5.26%. The price has to fall to about $909, because $1,000 on $909 is a 10% return [1].

Rates the other way reverses it. If new bonds yield 3%, your 5.26% looks generous, buyers bid, and the price rises to about $971 [1].

The payout never moved. It was $1,000 throughout. Only the price moved, and it moved until the return matched what else was available [7].

How long you are locked in decides how hard it lands

Bonds do not all fall the same amount. What decides it is how long your money is tied up.

The measure has a name: duration, which is roughly how many years of payments you are still waiting on [8][9]. A bond repaying you next year has very little. One repaying you in 2046 has a lot.

The rule of thumb is direct. Multiply the duration by the change in rates, and you get the rough change in price [10].

Take a three-year bond paying 10% while rates sit at 5%. Work it through and the duration comes out near 2.62. A one-point move in rates shifts its price about 2.6% the other way [10].

Now stretch the same maths over thirty years. That one-point move can take a fifth of the price. Longer lock, bigger swing [8].

Where this hit real people

In 2022 central banks raised rates quickly, and bond prices fell hard [11]. Savers who had been told bonds were the steady part watched them drop alongside shares [12]. A broad slide in bond prices does reach ordinary accounts [13].

Many people sold. That was the expensive part.

Morningstar found the gap between what bond funds returned and what their investors actually took home ran near one percentage point, across rolling ten-year stretches [14].

That sounds minor until you see the base. Core bond indexes gained roughly 2% a year over the past decade, so badly timed buying and selling cut investor returns by about half [14].

Banks got caught by identical arithmetic, at scale. US banks began 2025 holding around $482.4bn of unrealised losses on the bonds they held, on FDIC figures [11].

Unrealised means on paper. It stays on paper only while nobody forces you to sell.

Silicon Valley Bank was forced to sell. It failed in March 2023, and its capital ratio had looked healthier than its peers beforehand [11][15]. The losses were survivable right up to the moment they had to be made real.

The mistake this sets up

The word “safe” is doing two different jobs, and most people hear only one.

A US Treasury is safe in the sense that the promise gets kept. Hold it to maturity and you get your money plus interest, near enough guaranteed [16].

It is not safe in the sense of holding a steady price day to day. Sell early and you take whatever the market offers that morning [16].

Those are two different guarantees. Mixing them up is why a “safe” holding can post a loss that feels like a betrayal.

There is an honest catch on the other side, too. Waiting does not make you whole. It means your money stays locked at 4% while new lenders earn 6%.

The cost is real either way. It simply appears as a lower price if you sell, and as income you never earned if you wait.

This is not an exotic corner of finance. Target-date retirement funds deliberately shift money into bonds as the target year nears [17]. Millions of people hold this exposure without ever picking a bond.

What is genuinely uncertain

Where rates go next is not knowable, and nothing here is a guess about that.

The backdrop is real enough. The 30-year Treasury yield pushed above 5.3%, close to a two-decade high, on worries about government debt, inflation and deficits [5]. US government debt passed $40 trillion [4]. Borrowing costs in the UK, France, Germany and Japan were dragged up with it [18].

What lasts is the arithmetic, not the forecast. However rates move, a fixed promise gets repriced through the only number that can move, and the longer the lock, the harder that lands [8].

Carry this. A bond’s payments are a promise. Its price is only today’s opinion of that promise. The promise did not change. The opinion did.