Why Bond Prices Fall When Yields Rise
Every bond investor eventually has this moment. You buy something called a debt investment because it’s supposed to be safe, rates move, and your gilt fund NAV drops 3% in a month. Nothing broke and nobody defaulted. You’ve met the most counterintuitive rule in fixed income: when yields rise, bond prices fall, and vice versa. Here’s why, with numbers rather than hand-waving.
The second-hand bond shop
Suppose you buy a fresh 10-year G-sec at ₹100 paying a 7% coupon, so ₹7 a year. A year later the RBI has hiked rates and new bonds pay 8%.
Now you want to sell yours. Your buyer has a choice between a new bond paying ₹8 a year and your old one paying ₹7. Nobody pays ₹100 for ₹7 when ₹100 buys ₹8 elsewhere. To sell, you have to cut the price until your bond’s effective return matches the market, which lands around ₹93. At that price your ₹7 coupon plus the eventual pull back to ₹100 at maturity works out to roughly 8% a year for the buyer.
That’s the entire mechanism. The coupon is frozen at issue, so the price is the only thing that can move, and it moves opposite to market yields:
- Yields up, existing coupons look stingy, prices down.
- Yields down, existing coupons look generous, prices up.
Try it yourself. Put any bond into the YTM calculator in “price from yield” mode and nudge the yield up and down.
How much the price moves: duration
Not all bonds fall equally, and the sensitivity is measured by modified duration, roughly the percentage price change per 1% move in yields.
| Bond | Modified duration | Yields +1% ⇒ price |
|---|---|---|
| 91-day T-bill | ~0.25 | −0.25%, a shrug |
| 5-year G-sec | ~4 | −4% |
| 10-year G-sec | ~7 | −7% |
| 30-year G-sec | ~13 | −13%, equity-sized |
Long maturity plus a low coupon means high duration and big swings. It’s why a “safe government bond fund” holding 30-year paper can have a worse month than the Nifty: no credit risk at all, plenty of rate risk. Those are different risks, and running them together is where the “bonds are safe, so why did my bond fund crash” confusion comes from.
The part everyone forgets
It cuts both ways. The 2025 rate-cutting cycle was the mirror image, and as the repo rate came down to 5.25%, long G-secs rallied hard and everyone holding duration looked clever. The same see-saw that punished fund holders in 2022 rewarded them in 2025.
Why hold-to-maturity investors can relax
Here’s the resolution. If you own an actual bond rather than a fund, and you hold it to maturity, the interim price is noise. You’ll collect every coupon and get face value back on the maturity date whatever prices did in between. The see-saw turns into real money only when you sell, or when you hold an open-ended fund whose NAV marks it daily and whose other investors can force selling at bad moments.
Four things follow from that.
Match maturity to your horizon. Money needed in 2029 belongs in paper maturing in 2029, and then rate moves stop mattering. A ladder does this across several years at once.
Know your fund’s duration before judging its risk. A liquid fund and a long-gilt fund are different vehicles wearing similar names.
Rising yields are good news if you’re still buying. Every new rupee buys more income. The see-saw only hurts sellers.
Don’t buy long duration for safety. Buy it as a deliberate view on rates, sized with the duration calculator’s shock table in front of you.
FAQ
If I hold to maturity, did I lose nothing when rates rose? Nothing in nominal terms. You do carry an opportunity cost, since your money is locked at the old lower rate, and the market price is what makes that cost visible.
Why did my short-duration debt fund dip too? Smaller see-saw, same physics, and sometimes a credit event rather than rates. Check which risk moved.
Do FDs have this risk? Economically yes. A 5-year FD at 6.5% hurts the same way when rates reach 8%. The bank never shows you a price, so you never see the mark-to-market. Invisible isn’t the same as absent.
Educational content, not investment advice. Tax rules current for FY 2026-27 to the best of our knowledge, but verify with a professional before acting. See the full disclaimer.