What happens to bond prices when overall market interest rates rise?

When overall market interest rates rise, bond prices typically decrease due to the inverse relationship between interest rates and bond prices. This occurs because newly issued bonds will pay higher interest rates, making existing bonds (which have lower rates) less attractive to investors. Consequently, the prices of existing bonds must fall in order to offer a yield that is competitive with the new higher-interest bonds available in the market.

As investors seek to maximize their return, they will demand a discount on existing bonds to match the higher yields offered by new issues, thus driving down the prices of those existing bonds. This principle is a fundamental aspect of bond pricing and is key for understanding how changes in economic conditions can affect investment portfolios.