What does an increase in interest rates generally mean for bond prices?

An increase in interest rates generally results in bond prices trending downwards due to the inverse relationship between interest rates and bond prices. When interest rates rise, newly issued bonds offer higher yields compared to existing bonds that were issued at lower rates. As a result, the market adjusts by lowering the prices of existing bonds so that their yields become competitive with the new bonds. Investors will demand higher yields, which is reflected in lower prices for those existing bonds.

Thus, if interest rates increase, the market value of previously issued bonds declines, leading to the observation that bond prices trend downwards as a direct consequence. This understanding is crucial for anyone involved in bond investing or financial markets, as it emphasizes the importance of interest rate fluctuations in determining bond valuation.