A bond’s price falls when interest rates rise, by roughly its duration for each point, which is how “safe” bond funds lost 13% to 24% in 2022 and why they now pay around 5% in the US, UK and Australia.

A bond is a loan that you can sell to somebody else. A government or company borrows money, promises a fixed interest payment (the coupon) every year or half-year, and promises to repay the face value on a set date. Nothing about that changes while you hold it. What changes is the price other people will pay for it, because new bonds are issued at whatever rates the market now demands. When rates rise, an older bond paying less is worth less, and its price falls until it offers the same return as a new one. The US Securities and Exchange Commission puts the rule in one line: when market interest rates rise, prices of fixed-rate bonds fall¹.

That is the whole of why 2022 hurt. As central banks raised rates to fight inflation, the US ten-year Treasury yield went from 1.52% at the end of 2021 to 3.88% a year later², the broad US bond market index lost 13.01%³ and the UK government bond index 23.8%⁴. It is also why bonds look different in October 2026: the same ten-year Treasury now yields 5.31%².

Coupon, price and yield

Three numbers describe a bond. The face value is what is repaid at maturity, conventionally 100 or 1,000 units. The coupon is the fixed interest, quoted as a percentage of face value: a 4% coupon on a $1,000 bond pays $40 a year. The price is what the bond trades for today, quoted per 100 of face value. The yield joins them: what you earn on what you pay. A bond bought below face value yields more than its coupon, because you also gain the difference when it is repaid; one bought above face value yields less. The Reserve Bank of India’s primer on government securities states the same relationship for bonds sold at a discount⁶.

Yield to maturity is the single figure that accounts for all of it. The SEC defines it as the annual return on the bond if held to maturity, taking into account when you bought it and what you paid⁷. Take a bond with five years left, a 3% annual coupon, bought at 95. You collect 3 a year and then 100 at the end, 5 more than you paid. The yield to maturity, the rate at which those payments are worth exactly 95 today, works out at about 4.1% a year. It is the figure to compare with a deposit rate, not the coupon.

The SEC’s own example runs the other way. A $1,000 ten-year Treasury with a 3% coupon is bought at face value; a year later market rates for similar bonds are 4%. Its price drops to about $925, at which point a new buyer earns a yield of 4%¹. The holder has lost nothing in cash, and still collects $30 a year and $1,000 at the end, but the bond is worth less today if sold. As the SEC notes, if you intend to hold a bond to maturity, day-to-day price moves may matter less to you¹.

Duration: how far the price moves

Duration measures how sensitive a bond’s price is to a change in interest rates. It is stated in years, but FINRA, the US brokerage regulator, is clear that it is not simply a measure of time; it signals how much the price is likely to move when rates move. FINRA’s rule of thumb: a bond fund with a duration of 10 years will lose about 10% of its value if rates rise one percentage point, and one with a duration of two years about 2%⁸. Longer maturities and lower coupons mean longer durations, because more of the money arrives far in the future.

The table is worth reading row by row. A two-year bond barely notices a one-point rise in rates; a thirty-year bond loses about a seventh of its value. Duration is also roughly the break-even horizon: a holder whose bond falls 7.7% when yields jump from 4% to 5% earns an extra point a year from then on, which takes about the duration to make the fall back. FINRA quotes a Fitch example of the same arithmetic on a larger shock: if rates rose two points, a ten-year BBB bond with duration 8.4 could lose 15%, and a thirty-year one with duration 14.5 about 26%⁸.

Why “safe” bond funds fell in 2022

Bond funds in 2022 did exactly what the arithmetic says. Yields started from near record lows, so coupons provided almost no cushion, and they rose fast. The Bloomberg US Aggregate index, the broad measure of US investment-grade bonds, returned −13.01% for the year³, the worst result in the index’s history; before 2022 its worst twelve months, to March 1980, had been a 9.2% loss⁹. UK gilts fell further because the UK market is dominated by long maturities: the FTSE Actuaries all-stocks conventional gilt index returned −23.8%⁴.

Britain also had a crisis inside the fall. Between 1 August and their peak on 14 October 2022, thirty-year gilt yields rose more than 270 basis points, briefly exceeding 5%. Around the government’s fiscal announcement of 23 September they rose 140 basis points in the four days from 21 September, more than twice the largest such move since 2000¹⁰. Pension funds using leveraged liability-driven strategies were forced to sell gilts into a falling market, and on 28 September the Bank of England began temporary purchases of long-dated gilts “on whatever scale is necessary” to restore orderly conditions¹¹.

Graham and Helen Price, 61 and 59, in Bristol, moved £120,000 of their pension savings into a gilt fund in 2021 because it was “the safe part”. Had their fund matched the all-stocks index, 2022 would have cost them about £28,560, 23.8% of it⁴. Nothing defaulted; the British government has never missed a gilt payment¹². Their loss was the duration risk nobody had explained to them. Gilts did what they promised; “safe from default” and “safe from price falls” are simply different properties, and a long-duration fund has only the first.

The Garcias in Phoenix, 52 and 50, held $150,000 in a total-bond-market index fund. A 13.01% fall cost them about $19,515 on paper in 2022³. The index then returned 5.53% in 2023³, as higher yields began to be paid. The reason a fall in bond prices is partly self-healing is the same arithmetic: once prices have fallen, every coupon reinvested buys bonds at the new, higher yield. Vanguard’s investor guidance draws the same distinction between 2022’s losses and the role bonds play over time¹³.

What bonds pay now, country by country

Two things stand out. Long yields in the US and UK sit well above their policy rates, so investors are being paid for lending for longer, unlike the inverted curves of 2023. And yields differ hugely by country, mostly because expected inflation differs: India’s ten-year yield of 7.22% sits against a repo rate of 5.50%, raised on 7 October 2026¹⁵, while Singapore’s ten-year bond yields 2.47%¹⁸. A yield is only high or low against the inflation of the currency it is paid in, which is why comparing a rupee bond with a Singapore dollar bond on yield alone is a mistake. See how interest rates reach your money for the household side.

Government, corporate and inflation-linked bonds

Bonds differ in who owes the money and what the payments are tied to. Government bonds in a country’s own currency carry the least default risk, because the issuer can tax and, in extremis, print: Treasuries, gilts, Canada and Australian government bonds, Indian G-secs, Singapore Government Securities. Corporate bonds pay more because the borrower can fail. Inflation-linked bonds adjust their principal with prices, so their yield is a real yield: US TIPS track the consumer price index, and at maturity you receive the adjusted principal or the original, whichever is greater²³; UK index-linked gilts, first issued in 1981, adjust coupons and principal with the RPI¹²; India issued inflation-indexed bonds in 2013, first linked to wholesale prices and then to consumer prices⁶.

On 5 October 2026 the ten-year TIPS real yield was 2.95%, against 5.31% on the ordinary ten-year Treasury²⁴. The gap, 2.36 percentage points, is roughly the inflation rate the market expects over the decade: an investor who thinks inflation will run higher prefers TIPS, one who thinks lower prefers the ordinary bond. Australia’s ten-year indexed bond yielded 2.893% at the end of September¹⁷. US savers also have I bonds, which paid 4.26%, including a fixed 0.90%, for bonds issued between May and October 2026, up to $10,000 a year per person²⁵.

Credit ratings grade a borrower’s chance of default. Bonds rated BBB or better by S&P, or Baa or better by Moody’s, are investment grade²⁶; those rated BB or Ba and below are high-yield, or “junk”²⁷. Ratings are opinions, not guarantees, and some bonds carry risks the label hides. In March 2023, as UBS took over Credit Suisse with government support, the Swiss regulator FINMA announced the complete write-down of around CHF 16 billion of Credit Suisse’s AT1 bonds, a kind of bank bond built to absorb losses²⁸. In India, in April 2020, the RBI opened a ₹50,000 crore special liquidity facility for mutual funds after redemption pressure that followed the closure of some debt funds, stress it described as confined to the high-risk segment²⁹. Credit risk is where the extra yield comes from, and it arrives all at once.

A bond fund, a bond held to maturity, or a deposit?

A bond held to maturity by a solvent issuer returns exactly what it promised; price swings in between are only paper. A bond fund never matures: it keeps buying new bonds to hold its duration steady, so its value moves with rates indefinitely, but it also starts earning higher yields as soon as rates rise. Over a horizon about as long as the fund’s duration, the two tend to end up in a similar place. A fund buys diversification and ease; a single bond or a ladder of them buys a known date and amount. For money needed on a specific date, matching the bond’s maturity to the date removes the rate risk entirely.

A bank deposit is different again: no price that moves, and in most countries a government-backed protection scheme up to a limit. That limit is per person per bank, so large balances may need to be spread.

In India the choice between a fixed deposit and a debt fund changed in 2023. The Finance Act 2023 introduced section 50AA, under which gains on units of “specified mutual funds”, then those with no more than 35% in equity, bought on or after 1 April 2023, are taxed as short-term capital gains at the investor’s slab rate whatever the holding period³⁶³⁷. That removed the indexation benefit that used to make debt funds held over three years far more tax-efficient than deposits. From assessment year 2026-27 the definition was narrowed to funds with more than 65% in debt and money-market instruments, which took gold funds, many ETFs and some funds of funds out of the rule³⁶; the Income-tax Act 2025, which applies from the 2026-27 tax year, carries the same treatment in its section 76³⁷. What a debt fund still offers is deferral: deposit interest is taxed every year, a fund’s gain only when you sell.

Sneha and Vikram Nair, 37 and 39, in Pune, both in the 30% slab, are choosing where to keep ₹10 lakh earmarked for a car in three years. At SBI’s 6.30% three-to-five-year rate³⁸, the after-tax gap between a deposit and a debt fund earning the same return is about ₹2,590 over three years: deferral, nothing more. Since the deposit is insured up to ₹5 lakh per bank³² and its return is fixed, the deposit is the plainer choice for a dated goal; a debt fund earns its place only if it can reasonably be expected to return more after costs, which means taking some rate or credit risk.

Mei Ling Tan, 29, in Singapore, keeps S$30,000 as an emergency fund. The six-month Treasury bill auctioned on 24 September 2026 cut off at 1.92%³⁹; the November 2026 Singapore Savings Bond averages 2.45% a year over ten years, starting at 1.67%⁴⁰. Savings Bonds can be redeemed in any month without penalty and you always get your investment back in full⁴¹, which makes them unusually well suited to money that might be needed at short notice but probably will not be. For how big that buffer should be, see emergency funds: how much.

Where bonds fit in a household plan

Bonds do two jobs: they hold money that will be spent in the next few years with smaller swings than shares, and they usually cushion a portfolio when shares fall, although 2022, when both fell together, showed the cushion is not guaranteed. How much belongs in them depends far more on when the money is needed than on age alone; see asset allocation by age and the bucket strategy, explained. For bond funds specifically, read the fund’s duration and average credit rating on its factsheet before its past return. Mutual funds and ETFs explain the wrappers.