The higher the interest rate, the lower the bond price.

The market interest rate is inversely proportional to the market price of bonds.

When interest rates rise, people have better expectations for the future and expect higher interest income, so they prefer short-term bond investment, that is, commercial banks will get more investment and more income. On the other hand, long-term bonds and industries based on long-term investment, such as insurance and funds, will get less investment, which is bad news.

On the other hand, when the interest rate rises to a certain extent and the money supply cannot meet the needs of social development, the central bank will expand the money supply and increase the money supply, thus lowering the interest rate. At this time, rational investors will tend to invest for a long time, such as long-term bonds, funds and insurance industries. Then, the investment in short-term bonds will decrease, the investment obtained by commercial banks will also decrease, and the profits will also decline.

Value determines price!

The value of a bond is the coupon rate (and principal) of the bond. Because of the persistence of the bond market (countries and enterprises issue a large number of bonds in the market every year), investors can think that they can buy government bonds at any time. Based on the above situation, investors mainly consider whether the actual yield of bonds in this period is in line with the market-recognized value when choosing bonds.

For example, the country recently raised interest rates, because the interest rate of previously issued (fixed interest) bonds is not adjusted, in order to make the market recognize the transaction price of a previously issued bond, bonds can only adapt to market value positioning by adjusting the yield (that is, the transaction price changes). (For example, the maturity dates of seven-year bonds issued two years ago and five-year bonds issued in the same year are basically the same, but the country pays the principal of the bonds at face value at maturity. Because the coupon rate of the seven-year bonds issued two years ago is low, the real rate of return can only be made up by falling prices, so that the real rate of return for new investors to buy these two varieties is basically the same.

Conclusion: When the interest rate rises, the price of general fixed-rate bonds will drop obviously.

Of course, there are exceptions: floating rate notes, because the interest rate of bonds changes with the changes of the market, floating rate notes will not necessarily fall when it raises interest rates. Another example is corporate bonds issued by enterprises. If the enterprise goes bankrupt, the value of the bond will become "zero", regardless of whether the market cuts interest rates at this time.

The price of bonds is determined by three main variables: (1) the term value of bonds, which can be calculated according to the par value, coupon rate and term; (2) The maturity date of bonds is from the issue date or trading day to the maturity date of bonds; (3) The market rate of return or market interest rate shall be the market interest rate of other financial assets with the same risk as the bond.

The transaction price of bonds is opposite to the change direction of market interest rate. If the market interest rate rises, the bond price will fall. On the contrary, the market interest rate falls and the bond price rises.

Before explaining the relationship between the two, we need to understand how investors can profit from bond investment. For example, if an investor buys US Treasury bonds with a maturity of 10, it is equivalent to lending money to the US government for 10. In the next 10 year, the U.S. government will pay interest to investors on a regular basis according to coupon rate, and repay it at face value when paying the last interest. Bond investors hold bonds until the maturity date, during which they can get regular interest and get back the face value of cash on the maturity date. If investors sell goods before the maturity of bonds, they can make a profit at the bond price at that time (for example, the price rises).

Bond prices are mainly affected by market supply and demand. Generally speaking, when the interest rate is expected to fall, the bond price will rise, because more investors will choose to buy bonds with cash on hand to receive a fixed coupon rate. In this case, investors can earn interest and price. Therefore, when investors expect the long-term trend of interest rates to decline, they can consider increasing investment in bond funds.

Generally speaking, the interaction between economic development speed and market interest rate is as follows:

If the American economy grows rapidly and the market interest rate rises, it will cool down the brokers;

If the American economy grows steadily, it will maintain the current interest rate;

If the economic growth in the United States slows down and the market interest rate decreases, it can stimulate investment and develop the economy.

In addition, the trend of medium and long-term bond yields can usually reflect the market's expectation of interest rate trends. When the bond interest rate is lower than the current interest rate, it can reflect that the bond market expects that the interest rate will not rise or even fall. According to the experience given by history, the bond yield will be one step ahead of the federal funds rate. For example, in mid-2000, bond yields fell first, while the federal funds rate began to fall at 200 1 1; In mid-2003, bond yields rebounded, while the federal funds rate gradually increased in mid-2004. When bond yields begin to fall, such as in 2000, the federal funds rate may fall.

Small dictionary of bonds

Bond price refers to the transaction price of buying and selling bonds in the market.

Coupon rate is the interest paid to investors in a specific period.

Fruit/yield refers to the average annual yield of investors who buy bonds and hold them until maturity, which is usually not equal to the target interest rate of the federal savings fund, but the two are roughly synchronized.

The par value refers to the amount when the last interest is paid, which is usually not equal to the price when the bond is purchased.

The interest rate of the Federal Savings Fund refers to the interest cost of mutual loans between financial institutions, and also refers to the target interest rate set by the Federal Reserve, but it is not equal to the rate of return [because the rate of return is determined by the market].

Duration means that long-term bond prices are more sensitive to interest rates, while short-term bond prices are less sensitive to interest rates.

Investor strategy

If investors agree that interest rates will fall after a period of time, they can consider accumulating or increasing the proportion of bond investment. In fact, because the bond market and the stock market have little correlation, investing some assets in bonds will help spread risks and make the overall return of the portfolio more stable.