Why Government Bonds Fall When Interest Rates Rise

Imagine you bought a German government bond with a 20-year maturity five years ago. Back then, the interest rate was 1%. Today it's 2.3%. That sounds like your money is working better, but your bond portfolio is down 6.7%.

Sounds crazy, right? But that's exactly how bond math works.

The Seesaw Rule: Rates Up = Bond Prices Down

A government bond is a simple deal: The government says, "Give me €1,000, and in 20 years I'll give you your money back plus a little interest each year." When you buy it, you have a contract.

But here's the painful twist: Someone else can now buy the same bond with a higher interest rate. Why would anyone buy your bond (paying 1%) when they can get a new one paying 2.3%? They'd only buy yours if you gave them a discount. That's why the price falls.

The iShares 20+ Year Treasury Bond ETF (TLT) — a massive pool of bonds — has lost an average of -6.7% per year from 2021 to 2026.

What This Means for Your Money

If you put €10,000 into a bond ETF hoping it was "safe": It is safe in the sense that nobody's stealing it. But the value on paper has gone down because interest rates went up.

This isn't a disaster as long as you can hold the bond until maturity. After 20 years, you get your €10,000 back (plus interest). But if you need to sell early, you lock in a loss.

The Most Important Lesson

Bonds aren't risk-free. They have a different risk than stocks: not "crash" risk, but "interest-rate" risk. The longer the maturity, the bigger that risk.

When rates fall, bonds win. When rates rise, bonds lose. That's the seesaw.

That's why professionals often hold short bonds (2–7 years): The interest-rate risk is smaller, and you still get decent returns.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Past performance is no guarantee of future results.