The theory about bonds say that when the interest rates raise, bonds value falls since today's bonds have a higher yield than yesterday's bonds.

However, let's take the 2018-2019 period. The FED raised interest rates from 1.5 to 2.5 as can be seen here.

However, the Vanguard's USD Treasury Bond UCITS ETF (see here) increased its value by quite a lot during the same period.

In other words, if an investor would have invested all his money 1 January 2018 in this ETF, it would have obtained a benefit selling on 1 January 2019, even though the FED raised interest rates 'a lot' during this period. Doesn't this contradict the theory?


2 Answers 2


Here's the performance of the Vanguard VGIT Intermediate-Term Treasury ETF.

Note how the value fell from (at least) July 2016 through around August 2018, which is what "the math" says should happen.

Then it jumped, even though rates were still rising, which is -- as you pointed out -- counter to what "the math" says should happen.

The only reason that would happen is that people wanted the stability of US Treasuries more than they wanted high yields.

A graph of the S&P 500 index shows that it declined sharply in the last portion of 2018. Thus, it seems that traders "fled" to Treasuries for security in that period.

The Treasuries ETF kept rising in 2019 because of falling rates.

Bottom line: the simple math equation governing bond price is NOT the only reason people buy bonds (and especially US Treasuries).

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  • 2
    Also, the FED sets short-term rates. Beyond that, yields are due to market expectations and supply/demand. It's possible that mid- to long-term rates fell as short-term rates rose.
    – 0xFEE1DEAD
    Commented Aug 19, 2021 at 17:16

I disagree with @RonJohn analysis. The bond math completely explains price vs. yield. Effective yield (what is shown on Google Finance, etc.) is simply the annual coupon payments or dividends, divided by the market price.

As for @Martel question, the Vanguard fund mentioned has a duration of 7 years or so. The Fed changes interest rates at the short end of the yield curve. The Fed does not control medium and long term rates, which reflect inflation expectations and investor preferences.

The scenario described by @Martel, where this fund increased in price even as the Fed raised rates on the short end, seems to be a flattening Treasury yield curve. Indeed, this is what happened in 2018.

  • But, having that the FED raised short-term interest rates, in order to keep the yield curve more or less flat, you need to increase (slightly at least) long term bonds rates. This means that the current long term bonds should decrease its value since those to be released tomorrow will have a higher rate. Isn't this correct?
    – Martel
    Commented Aug 20, 2021 at 9:56
  • Think of the yield curve as a smorgasbord. There's something for everyone, and demand or supply for one thing can affect demand for another. But just because it affects demand does not mean that it controls demand for that other part of the curve. Commented Aug 20, 2021 at 15:56

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