How Bond Yields Affect Prices in Secondary Markets

When I look at bond prices moving up and down in the secondary market, I remind myself of one simple rule that explains most of it: bond yields and bond prices usually move in opposite directions. Once this clicks, the market starts to feel far less mysterious—especially for anyone who wants to invest in bonds online and understand why a bond you bought yesterday can show a different price today.

A bond promises fixed cash flows: interest payments (coupon) and the principal at maturity. That promise does not change. What changes is the return the market expects from similar bonds today—what we commonly call the market yield. The secondary market is where these two ideas meet: a fixed set of cash flows and a yield that keeps adjusting with the economy.

Why prices fall when yields rise

Let me explain it the way I think about it in real life. Imagine I hold a bond that pays a 7% coupon. If market yields rise and new bonds are now offering 8% or more, my 7% bond suddenly looks less attractive to a new buyer. The bond cannot change its coupon, so the only way it can "match" the market is by becoming cheaper. Its price falls until the overall return from buying it at that lower price feels comparable to the new 8% level.

The opposite also happens. If market yields fall and new bonds are being issued at 6%, my 7% bond looks better. Buyers are willing to pay more for it, and the price rises.

This is the core reason secondary market bond prices react so quickly to changes in yields.

The role of interest rates and RBI expectations

Bond yields are heavily influenced by interest rate expectations. When investors think policy rates may rise, yields across the curve often move higher. When they expect a supportive or easing environment, yields can soften.

This matters because not all bonds react in the same way. Longer-maturity bonds are usually more sensitive. A small change in yield can create a larger price movement in a 10-year bond than in a 1-year bond. That is why I always match maturity with intent: if I may need liquidity or want stability in price, I prefer shorter tenors; if I have a longer horizon and can tolerate price swings, longer maturities can play a role.

Credit perception and "extra yield"

Apart from interest rates, markets also price in credit risk. If investors feel an issuer has become riskier, they demand a higher yield to compensate. That higher required yield pushes prices down.

This is where yield spreads come in: investors compare the yield of a corporate bond against a relatively safer benchmark. The spread reflects credit comfort, liquidity, and market sentiment.

For those planning to buy Indian government bonds, credit risk is typically not the main driver. Price movements in government securities are more linked to inflation expectations, RBI policy stance, liquidity in the system, and broader demand-supply dynamics.

What secondary markets really offer

The secondary market is often misunderstood as "trading" in the short-term sense. To me, it is more about flexibility and price discovery. It allows an investor to enter at one yield level, and later reassess when market conditions shift.

When yields rise, prices fall—sometimes that is exactly when good long-term opportunities emerge, because you may be buying a bond at a more attractive price and yield. When yields fall, prices rise—this is when investors who already hold bonds may see mark-to-market gains.

And as more people invest in bonds online, this price visibility becomes more immediate. That is helpful, but it also means investors need context so they don’t mistake normal yield-driven movement for something alarming.

Keeping the right perspective

In my view, the best way to stay grounded is to separate two things:

1. The bond’s promise (coupon and maturity payment), and
2. The market’s mood (yields moving with rates, inflation, and expectations).

Secondary market prices respond to the market’s mood. If I plan to hold to maturity, interim price moves matter less. If I may sell earlier, then understanding yield movements becomes essential.

That is why I treat yield-price dynamics as a practical skill—not theory. It helps me read the market calmly, choose maturities with intention, and make better decisions whether I’m buying a bond today or tracking its value later in the secondary market.

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