Bonds, Duration and the Year They Fell
Retirees hold bonds for stability, which makes a year when bonds fall genuinely alarming. The mechanism is arithmetic rather than misfortune: when interest rates rise, existing bonds paying less become worth less. Duration measures how much, and the same number that predicts the fall also tells you how long it takes to be paid back.
- The inverse relationship:: When rates rise, the price of existing bonds falls, because new bonds pay more.
- Duration measures it:: Roughly, the percentage fall equals duration multiplied by the rise in rates.
- The loss is recovered:: Reinvestment at higher yields earns back the price fall over approximately the duration.
- Funds and individual bonds differ:: An individual bond matures at par; a fund has no maturity date, only a rolling duration.
Where the AI summary above gets this wrong
"Bonds are the safe part of a portfolio, so they should not lose money."
That's surface-true. Here's what it misses:
- Safe means something specific and narrower than people assume — A high-quality bond is safe from default: you will be repaid. It is not safe from price movement before maturity, and in a year of sharply rising rates a long-duration holding can fall like an equity. Both statements are true at the same time, and confusing them is what makes the fall feel like a betrayal.
- The fall and the recovery are the same event — A price fall driven by rising rates is the market repricing a stream of payments that is now below the going rate. The compensation is that all reinvested income now earns more. Over a holding period equal to roughly the duration, those two effects cancel — which is why selling into the fall is the one action that turns a paper loss into a real one.
- A bond fund is not a bond — An individual bond held to maturity returns its face value on a known date whatever happened to prices in between. A fund never matures; it holds a rolling portfolio at roughly constant duration. For money needed on a specific date, that difference matters, and it is the argument for holding actual bonds or a defined-maturity product for near-term spending.
01 What a bond actually is
A bond is a loan. The issuer pays interest at a stated rate and returns the principal on a stated date. Two risks attach: that the issuer fails to pay, and that the price moves before maturity because rates elsewhere have changed.
For Treasury securities the first risk is minimal, which is why they are the reference point. For corporate and municipal issuers, credit quality is a real variable and the extra yield offered is the compensation for it.
Within a retirement portfolio, bonds do a specific job: they hold value when shares fall, and they provide money to spend without selling equities at a bad moment — the core of the sequence of returns defence.
Source: Bonds
02 Duration, and what it predicts
Duration expresses how sensitive a bond or bond fund is to a change in interest rates, measured in years. As a working approximation, a one-percentage-point rise in rates produces a fall of about one percent for each year of duration.
So a fund with a duration of six years falls about six percent when rates rise a point, and about twelve when they rise two. Longer maturities carry longer durations, which is why a long-dated government bond fund can behave far more violently than a short-dated one holding the same credit.
The same number works in reverse. When rates fall, prices rise by approximately the same measure, which is why long-duration holdings performed strongly in the decades when rates were declining.
Shows: the rough price impact on a bond holding when rates rise, using duration, on the standard approximation that a one-point rise costs about one duration-year of value. Ignores: the higher interest the holding then earns, which recovers the loss over time, convexity, credit risk, and the difference between a fund and an individual bond held to maturity.
Source: Interest rate risk
03 Choosing duration deliberately
Duration should be matched to when the money is needed. Money for spending in the next two or three years belongs in short-duration holdings, where a rate move barely registers. Money that is genuinely long-term can carry more.
That is the reasoning behind holding cash and short bonds for the first years of spending, which is what makes a fall in longer bonds tolerable — nothing has to be sold into it. The alternative, one intermediate fund for everything, works too, provided the holder understands what a bad year looks like before it arrives.
Where bonds sit also matters. Interest is ordinary income, so bond holdings generally belong inside tax-sheltered accounts under the asset location logic, with a taxable account holding equities that generate less annual tax.
Source: Mutual funds
The year bonds fell sharply produced more panicked calls than any equity market I can remember, because people held them precisely so this would not happen. The explanation that helps is that the fall and the recovery are the same event seen at different times: the price dropped because the future income went up. If you did not have to sell, you did not lose anything permanent. The lesson is about duration, not about bonds.
FAQ
Why did my bond fund lose money?
Interest rates rose, so existing bonds paying less became worth less. The fall is approximately the fund's duration multiplied by the rise in rates, and the higher yields subsequently earned recover it over roughly that period.
Is an individual bond safer than a bond fund?
For money needed on a specific date, an individual bond has an advantage: it matures at face value whatever prices did in between. A fund never matures, so its price movement is permanent until it is recovered through higher income.
What duration should I hold?
Match it to when the money is needed. Spending for the next two or three years belongs in short-duration holdings; money that is genuinely long-term can carry more.
Sources
Regulator references
- Bonds · U.S. Securities and Exchange Commission · 2026What a bond is, what it pays, and the risks it carries.Last verified: 2026-09-07
- Interest rate risk · U.S. Securities and Exchange Commission · 2026Why bond prices fall when rates rise, and why longer maturities fall further.Last verified: 2026-09-07
- Mutual funds · U.S. Securities and Exchange Commission · 2026How a bond fund differs from holding individual bonds to maturity.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
Run this rule against your situation
See what this rule does to your own projection — month by month, to age 90.
Join the Waitlist
Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.