Do you own bonds and are hoping for interest rates to go up so that you can make more money? You’re not alone. Many people are confused about what makes bonds go up and down in value. Once you own a bond, you should be hoping for interest rates to go down, not up.
The return that you get from a bond is determined by prevailing interest rates. However, once you buy a bond, your interest rate is locked in not only for this year, but all future years until the bond matures. If rates go up, you don’t get to collect the higher rate next year. Instead, higher interest rates will make your bond then looks worse in comparison to new bonds and other investors won’t be willing to pay as much for your bond.
This is the basis for the inverse relationship between bond values and interest rates. Before you buy a bond, you’re hoping for higher rates, but after you’ve bought the bond, its value rises if interest rates go down, not up.