In a traditional asset allocation strategy, bonds are often viewed as a stabilizing counterpart for stocks and other more volatile investments. While it’s true that bond prices are generally more stable than stock prices, the bond market can experience unusually high volatility, and when this happens, it would be natural for bond investors to have concerns.
As with any unusual market volatility, the situation is typically temporary, and the effect on your own investments depends on your time frame. Can you ride out the volatility, or do you have to sell investments while prices are down? It will also depend on whether you hold individual bonds or bond funds and the specific bonds or funds you hold.
When considering bond market movements, keep in mind that bond yields, the return to an investor based on purchase price, move inversely with bond prices. So, when bond prices decline, yields rise and vice versa.
Individual bonds
If you bought an individual bond for income and intend to hold it until maturity, market volatility should have no effect on the bond, assuming the bond issuer does not default. The yield on the bond you hold will not change regardless of prices on the secondary market — i.e., the yield will be based on the bond’s coupon rate and the price you paid.
For higher-rated bonds, considered “investment grade,” the risk of default is typically low, even during periods of unusual market volatility. Lower-rated “junk bonds” have a higher risk of default that could be exacerbated by volatility, but even so, the risk generally depends more on the financial stability of the bond issuer than on the state of the bond market.
If you want to sell a bond before maturity, prices on the secondary market will affect the price you receive for the bond. If this is the case, it’s generally not wise to sell when bond prices are falling, because you are locking in your loss. If possible, it might be wiser to wait until prices recover before selling.
Of course, if bond prices are rising, it could be an appropriate time to sell your bond on the secondary market. Keep in mind, however, that it is impossible to predict future price movements or whether the market has reached a high or low.
Bond funds
Bond funds carry the same risks as their underlying bonds, but they have characteristics that can make them perform differently during periods of high market volatility. Bond funds generally do not have a maturity date (with the exception of certain defined-maturity funds), so you cannot insulate yourself from market volatility by holding fund shares to maturity the way you might with an individual bond. Fund share prices will change with the market, and it can be disturbing to see the value of your fund shares dropping. As with selling individual bonds on the secondary market, it may be more appropriate to take a patient approach and wait for prices to recover if that is suitable for your time frame and investment strategy.
The individual bonds held by funds are typically replaced as they mature, and new bonds will be purchased at the prevailing market prices at that time. So, if bond prices are dropping, new bonds may be purchased at lower prices and higher yields, which could ultimately increase the share price of the fund.
There are two types of bond funds. Index funds are passively managed and follow a specific index by holding the bonds in the index or a representative portion of those bonds. In an index fund, the bonds would typically only be replaced as they mature, with the potential effects discussed above.
On the other hand, the managers of an actively managed bond fund might buy and sell bonds at any time in an effort to give shareholders an edge over the market. Fund managers may respond to market volatility in different ways; for example, they might try to preserve the fund’s yield over the share price or vice versa. It’s important to understand the strategy and goals of any fund you own or are considering.
What causes bond market volatility?
As with all markets, the most fundamental factor in driving bond market volatility is supply and demand. When investors rush to buy bonds for any reason, prices will generally go up, and when investors are less interested in buying bonds, prices will go down. Here are some of the key factors that can cause shifts in investor interest and consequent higher volatility.
Interest rate changes. When interest rates rise, bond prices typically fall, because investors can purchase new bonds offering higher coupon rates. On the other hand, when interest rates decline, bond prices typically rise, because existing bonds may offer higher yields than new bonds. In either case, the price movement essentially brings bond yields on the secondary market in line with the coupon rate that might be offered on new bonds.
Other central bank policies. Central banks like the Federal Reserve not only influence interest rates but also control the money supply. Purchasing bonds allows funds to flow out of the central bank and increase the money supply, called quantitative easing. This also reduces the quantity of available bonds, which can lead to higher bond prices and lower yields. Conversely, allowing bonds to mature without repurchasing decreases the money supply and can lead to lower bond prices and higher yields.
Economic data and expectations. If the economy is weakening or projected to weaken, investors may move to purchase bonds for stability and asset preservation, which can increase prices due to supply and demand. On the other hand, if the economy appears to be strong, investors may prefer stocks, and bond prices could fall. Inflation expectations are also significant, because high inflation may lead the Federal Reserve to raise interest rates, while lower inflation may allow the Fed to lower rates, especially if the economy weakens.
Credit changes. When a bond issuer’s credit rating declines, it can make the issuer’s bonds less appealing to investors, pushing prices downward. Conversely, a higher credit rating could push prices upward. Sometimes, credit concerns due to economic issues or government policies can affect a broad range of bond issuers.
Global events. Depending upon the specific event and geopolitical climate, investors might rush to purchase bonds as a “flight to safety.” However, in some cases, investors could rush to sell bonds, especially bonds related to a country, region, or industry that appears to be in a situation that could affect the stability of interest and principal payments.
Supply and demand imbalances. Supply and demand drive bond prices on a daily basis, but there are times when supply and demand become imbalanced too quickly and prices have to adjust quickly in response. For example, a large number of bonds might be issued at a time when there is not enough investor interest, driving prices down. Or a surge of investor interest might be too strong for the available bond supply, pushing prices up.
Market sentiment. All of the factors discussed here play into market sentiment, but sometimes there can be a “herd mentality” that is beyond specific explanations.
Regardless of the factors behind bond market volatility, it may not be wise to make investment decisions based on emotional reactions to troubling news and short-term market movements. While there could be appropriate reasons to buy or sell bonds at any given time, it’s important to remain calm and take a long-term view of the role that bonds play in your portfolio.
The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking higher rates of return involve higher risk. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds.
The performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in any index. Past performance is no guarantee of future results. Actual results will vary.
Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, and economic and political risk unique to the specific country, which could result in greater price volatility.
Funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional.
This content has been reviewed by FINRA.
Prepared by Broadridge Advisor Solutions. © 2026 Broadridge Financial Services, Inc.
The articles and opinions expressed in this document were gathered from a variety of sources, but are reviewed by Strickland Financial Group, LLC prior to its dissemination. Any articles written by Graham M. Strickland or Strickland Financial Group will include a ‘by line’ indicating the author. Strickland Financial Group provides a full range of financial services, including but not limited to: life, health, disability and long term care insurance, group and individual retirement plans and individual investments. Receipt of literature in no way implies suitability of product(s) in your financial plan. Strickland Financial Group maintains networking relationships with estate planning attorneys and tax professionals but does not itself offer legal or tax advice. Securities offered through Osaic Wealth Inc., Member FINRA/SIPC. Advisory services offered through S&S Wealth Management, LP (S&S). A Registered Investment Advisor. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Strickland Financial Group is not affiliated with S&S Wealth Management, LP.
This communication is strictly intended for individuals residing in the state(s) of TX, NE, OK and FL. No offers may be made or accepted from any resident outside the specific states referenced.
