Why Bond Prices Fall When Rates Rise

In the simplest form, buying a bond is really just buying the promise of a fixed payout at a fixed time. What you'd pay for that future payout today can be calculated as that future payout, discounted back to the present by the current going interest rate. So... why do bond prices go down when the Fed raises rates? Basically, when the Fed raises its policy rate, yields on a risk-free asset like U.S. Treasuries rise too, and every other borrower has to offer more to stay competitive (usually more than Treasuries, since they can't print their own money like the U.S. government can, so are by definition not as "risk-free"). If you have a bond (which is again really just a future payout of a specific amount of money), and you want to sell it, then the fair market price of your bond now depends on the (now higher) current going interest rate. This essentially just increases the slope on the curve below, which (as you can see when the slope increases while the future payout stays fixed) means the price you can sell your bond for today has to go down to match the new, higher interest rate. TL;DR: the future payout never changes, so when rates rise, the same future-dollars are worth fewer now-dollars. Drag the rate to see the effect on the plot.

Why "the payout is fixed but worth less"? Because the curve from today's price up to the fixed future payout is the interest rate compounding. A higher rate is a steeper curve — but it still has to land on the same fixed payout, so it must start lower. That lower starting point is the new, cheaper price. The same logic runs in reverse when the Fed cuts rates.