Why bond prices fall when yields rise

A conventional bond promises a fixed schedule: periodic coupons and the return of principal at maturity. Because that schedule cannot change, the only variable left is what an investor will pay for it today. When newly issued debt offers a higher return, the older, lower-coupon bond has to become cheaper before anyone will buy it. That price fall is the same event as the yield rise, described from the other side.

Yield is a result, not a setting

Quoted yield to maturity is the discount rate that makes the present value of a bond's remaining cash flows equal to its market price. Nobody sets it directly. Buyers and sellers set the price; the yield is what falls out of the arithmetic.

Duration explains the size of the move

Duration is a weighted average of when the cash flows arrive, and it approximates the percentage price change for a one-percentage-point change in yield. A long-dated, low-coupon bond returns most of its value far in the future, so a change in the discount rate compounds over more years and hits the price harder. A short-dated bond barely flinches.

• Longer maturity: more duration, more price sensitivity.
• Lower coupon: more of the value sits at maturity, so more duration.
• Rising yields hurt existing holders; they help reinvestment of future coupons.

Credit sits on top of it

Government yields describe the price of time. Corporate yields add a spread for the risk that the borrower does not pay. Those two components can move in opposite directions in a stress episode, which is why a corporate bond fund and a government bond fund can behave nothing alike in the same week.