Bond prices and interest rates are a seesaw

STEP 1A bond is an IOU that pays interest

Before looking at the seesaw, let's first understand exactly what the 'bond' that rides the seesaw is. You only need to know three unfamiliar terms.

The three promises of a bond

A bond is an IOU written by a government or company when it borrows money. Three things are written on it: the par value, the principal to be returned at maturity; the coupon rate, the rate of interest paid each year; and the maturity, the date the principal is returned. For example, with a Treasury bond of 'par KRW 1 million, coupon 3% a year, 10-year maturity', the government pays KRW 30,000 in interest every year for 10 years and returns KRW 1 million after 10 years.

The important point is that once these three promises are set on the issue date, they never change. Whether market rates rise or fall, this bond pays only KRW 30,000 a year to the end. But a bond can be bought and sold to others before maturity. The traded value, the bond's price, changes every day. The question of this lesson is ultimately: "The promises are fixed, so why does the price move?"

How much does the price need to be cut?

Let's calculate the simplest case. A bond with a 3% coupon and one year left to maturity returns the KRW 1 million principal plus KRW 30,000 in interest, KRW 1.03 million in all, after one year. If the new bond rate is 5%, the buyer asks, "How much do I need to put in today to earn 5% by receiving KRW 1.03 million?" This is the discounting we tasted in the bakery analogy in Lesson 1, converting future money into today's value (present value).

1. Money received in 1 yearPrincipal KRW 1 million + interest KRW 30,000 = KRW 1.03 million
2. If the market rate is 5%KRW 1.03 million ÷ 1.05 = about KRW 981,000
3. If the market rate is 2%KRW 1.03 million ÷ 1.02 = about KRW 1.01 million

When the market rate rose to 5%, the bond's price fell from KRW 1 million to about KRW 981,000, and when it fell to 2%, the price rose to about KRW 1.01 million. The actual annual return you earn when you buy now at that price and hold to maturity is called the bond yield. When the news says "the 10-year rate rose", the rate is this bond yield. The coupon rate is the interest rate promised at the start, and the bond yield is the interest rate calculated at today's market price.

STEP 2The seesaw principle and the power of maturity

We confirmed the direction of the seesaw with a one-year bond. Now let's extend the maturity to 2, 10 and 30 years and see how far the seesaw tilts.

In pictures: the rate and bond price seesaw

There are three hypothetical Treasury bonds with a 3% coupon and a par value of 100. Change the market rate with the slider and tap the cards below to pick the maturity to put on the seesaw. When the market rate is 3%, all three bonds are exactly 100.

Press the 'Rates up · 5%' button. For the same 2 percentage point rise, the 2-year bond falls only about 3.7%, while the 10-year falls about 15% and the 30-year about 31%. The pivot of the seesaw is the same, but it's like the seesaw's arm getting longer the longer the maturity.

Why does it move more the longer the maturity?

Someone holding a 2-year bond only has to put up with the low interest (3%) for 2 years, then gets the principal back and can switch to a 5% bond. The loss is only 'two years of lower interest'. A 30-year bond has to receive that unfavorable interest for 30 years. The price is cut by as much as the lower interest piles up over that time. On top of that, principal far in the future gets discounted many times over. 100 received in 30 years is worth about 41 discounted at 3%, but shrinks to about 23 when discounted at 5%.

Duration expresses this 'price sensitivity to rate changes' as a single number. Roughly, read it as "when rates move 1 percentage point, the price moves by the duration in %". A duration of 8 means the price falls about 8% when rates rise 1 percentage point. Duration is larger the longer the maturity and the lower the coupon rate.

A hypothetical calculation example (annual interest, par 100).

The table shows one more thing. When rates rise 2 percentage points, the 30-year bond falls 30.7%, but when they fall 1 percentage point, it rises 22.4%. The gain when rates fall is bigger than you'd expect because the discounting compounds multiplicatively. It is also why long-term bonds can earn large returns when rates fall.

STEP 3US long-term bonds in 2022

Now let's return to today's question. Let's read for ourselves, with the seesaw and duration, why the US long-term Treasury ETF fell so much in 2022.

From record-low rates to the highest rates in 16 years

1. August 202010-year 0.52%

   Amid the COVID shock, the US 10-year Treasury yield fell to 0.52% on Aug 4, 2020. It is the lowest since the data began in 1962. Long-term bond prices were at a high.

2. End of 202110-year 1.52%

   Rates began to rise as the economy recovered, but were still at a low level.

3. 2022Inflation surge and rapid rate hikes

   As CPI rose to 9.1% in June, the Fed raised its policy rate quickly, and the 10-year ended the year at 3.88%, while the 30-year went from 1.90% to 3.97%.

4. October 202310-year 4.98%

   On Oct 19, the 10-year yield rose to 4.98%. It was the highest in about 16 years, since 2007, and long-term bond prices hit bottom around this time.

The seesaw in practice: TLT and the 10-year yield

TLT is a representative bond ETF that invests in US Treasuries with maturities over 20 years. In the graph below, see how the blue line (TLT price) and the orange line (10-year yield) move in opposite directions like a mirror. Tap the graph to see that month's numbers.

TLT's month-end close fell about 51%, from $171.00 in July 2020 to $83.58 in October 2023. In 2022 alone, the price dropped 32.8%, from $148.19 to $99.56, and even with distributions (interest) added back, the loss was about 31%. The S&P 500 seen in Lesson 1 fell 19.4% the same year, so the 'safe asset' long-term Treasury fell more than stocks.

You can roughly check this with the duration from STEP 2. According to the manager iShares, TLT's effective duration was 14.69 years as of Oct 1, 2026. Duration gets longer the lower rates are, so it was longer than this in early 2022 when rates were at the floor. Taking duration as 15–17 and multiplying by the roughly 2 percentage point rise in long-term rates in 2022 (30-year from 1.90% to 3.97%) gives a 30–34% decline, which nearly matches the actual drop. It isn't that the US government failed to pay interest; the price simply reflected the fact that you have to hold a bond paying low interest for a long time.

For stocks, it goes like this

The bond seesaw isn't only a story about bonds. Any asset whose money arrives far in the future moves like a 'long-duration asset'. In Lesson 1, we said that when rates rise, the discount rate gets bigger and the same earnings get a lower multiple (P/E). Growth stocks whose earnings are concentrated far in the future, REITs that receive steady rent for a long time, and assets expecting long-term dividends tend to get heavy like long-term bonds when rates rise.

You can see how US long-term bonds and each sector have reacted to rate changes in the 'US long-term bonds' cell of the Impact Map of the Macro Map. As of Oct 1, 2026, the US 10-year yield is 5.24%, higher than the 2023 peak, and TLT's reference price was $77.83 on Sep 30, below the 2023 low.

Bond prices don't move on interest rates alone. Corporate bonds also move with the issuer's credit risk, foreign bonds with exchange rates, and inflation-linked bonds with inflation. And no one can know exactly how rates will move ahead. This lesson does not recommend buying or selling any particular bond or ETF.