The reason for the inverse relationship between interest rates and bond prices is quite simple
When interest rates rise, newly issued bonds offer a higher yield, making them more attractive to investors than existing bonds with lower yields
As investors shift their money towards these higher-yielding bonds, the demand for existing bonds decreases, and their prices fall
Conversely, when interest rates fall, the demand for existing bonds increases, driving up their prices
The impact of interest rates on bond prices can be seen more clearly by looking at bond duration
Duration is a gauge of a bond’s price sensitivity to interest rate movements
Bonds having longer periods are subject to interest rate swings more so than bonds with shorter maturities
This is because a longer duration means that the bond’s cash flows are further in the future