A bond's coupon is fixed when it is issued, so when market yields rise, the only way an older bond can offer new buyers the going rate is for its price to fall. Duration measures how far: a bond's price moves about 1% for each year of duration per 1 percentage point change in yield [2]. The 10-year Treasury yield rose from 4.14% on October 9, 2025 to 5.24% on October 9, 2026 [1], and the iShares 20+ Year Treasury Bond ETF (effective duration 14.69 years) returned -8.88% in the 12 months to September 30, 2026, while the 1-3 year fund (1.82 years) returned +1.47% [3][5].
Why do bond prices fall when yields rise?
A bond pays fixed interest, called the coupon, and returns its face value at maturity. Its yield is the annual return a buyer earns at today's price if the bond is held to maturity. Price and yield are two ways of stating the same thing, so they move in opposite directions.
FINRA, the brokerage industry's regulator, gives the standard example: a $1,000 bond paying a 6% coupon would have to be sold below face value if comparable new bonds paid 7%, because buyers could earn more elsewhere; if rates fell, the same bond could sell above face value [2]. The price adjusts until the old bond's yield matches the market.
A worked example
Take a 10-year Treasury note with a $1,000 face value and a 4% coupon (paid as $20 every six months), bought at $1,000, so its yield is 4%. If market yields for that maturity jump to 5% the next day, a buyer would pay only $922.05, because at that price the same $40 a year plus $1,000 at maturity works out to a 5% annual return. The holder has lost $77.95, or 7.8%, on paper. If yields fall to 3% instead, the price rises to $1,085.84, a gain of 8.6%. These prices are calculated with the standard present-value formula, discounting each payment at the new yield.
Maturity changes the size of the move. The same 4% coupon and the same 1-point yield change give very different results:
| 4% bond, $1,000 face | Price at 3% yield | Price at 4% yield | Price at 5% yield | Change from 4% to 5% |
|---|---|---|---|---|
| 2-year | $1,019.27 | $1,000.00 | $981.19 | -1.9% |
| 10-year | $1,085.84 | $1,000.00 | $922.05 | -7.8% |
| 30-year | $1,196.90 | $1,000.00 | $845.46 | -15.5% |
Source: calculated with the standard bond pricing formula, semiannual coupons, yield change applied immediately.
A longer bond locks in the old coupon for more years, so more of its value depends on payments that are now discounted at the higher rate. That is the idea duration turns into a single number.
What is duration?
Duration is a measure of how much a bond's price is likely to change when interest rates move. It is stated in years, but it is a sensitivity, not a maturity date. FINRA's rule of thumb: a bond with a duration of 10 would be expected to fall about 10% if rates rose 1 percentage point, and to rise about 10% if they fell by the same amount [2].
The simple formula is: percentage price change is roughly minus duration times the change in yield. The 10-year note above has a modified duration of about 8.2 years, so a 1-point rise predicts a loss of about 8.2%. Three versions of the measure are common:
- Macaulay duration: the weighted average time until the bond's cash flows are received.
- Modified duration: Macaulay duration adjusted for the yield level; it gives the percentage price change for a small change in yield.
- Effective duration: the version fund companies publish. It also accounts for bonds that can be called or prepaid early, which matters for mortgage and corporate bonds [3].
A 1-point move is 100 basis points; a basis point is one hundredth of a percentage point.
What is convexity, and why do gains beat losses?
Duration is a straight-line estimate of a curved relationship. In the example, it predicts a loss of 8.2% and a gain of 8.2% for a 1-point move either way, but the actual changes were a loss of 7.8% and a gain of 8.6%. Convexity measures that curve: it describes how duration itself changes as rates move. A bond with positive convexity loses less than duration predicts when yields rise and gains more when they fall [3].
Convexity grows with maturity. As of October 9, 2026, iShares reported convexity of 3.07 for its 20+ year Treasury fund, 0.57 for its 7-10 year fund and 0.05 for its 1-3 year fund [3][4][5]. For small yield moves, duration does most of the work; for large ones, such as 2022, convexity becomes noticeable.
How did duration play out in bond ETFs in 2026?
Treasury yields rose across maturities in the year to September 30, 2026: the 2-year from 3.60% to 4.88%, the 10-year from 4.16% to 5.29%, and the 30-year from 4.73% to 5.64% [1]. The Federal Reserve raised its target range by 25 basis points to 3.75%-4.00% at its September 15-16, 2026 meeting [1]. Funds with the same issuer (the US Treasury) and different durations then delivered very different results.
| Fund (ticker) | Holds | Effective duration, Oct. 9, 2026 | Total return, 12 months to Sept. 30, 2026 | Total return, 2022 |
|---|---|---|---|---|
| iShares 20+ Year Treasury Bond ETF (TLT) | Treasuries maturing in 20+ years | 14.69 years | -8.88% | -31.41% |
| iShares 7-10 Year Treasury Bond ETF (IEF) | Treasuries maturing in 7-10 years | 6.84 years | -3.73% | -15.23% |
| iShares Core U.S. Aggregate Bond ETF (AGG) | Investment-grade US bonds | 5.69 years | -1.87% | -13.06% |
| iShares 1-3 Year Treasury Bond ETF (SHY) | Treasuries maturing in 1-3 years | 1.82 years | +1.47% | -3.90% |
Source: iShares fund pages, NAV total returns including interest, accessed October 13, 2026 [3][4][5][6]; the funds are managed by BlackRock (BLK).
A back-of-the-envelope check shows how well the rule works. Long-term yields rose a little under 1 point, so a duration near 15 implies a price loss of roughly 14%; interest income of about 5% a year offsets part of that, which leaves a total near -9%, close to TLT's -8.88% [1][3]. SHY's shorter bonds saw bigger yield increases, about 1.3 points at the 2-year maturity, but a duration under 2 limited the price hit to roughly 2.4%, less than a year of interest [1][5]. In 2026 through October 9, total returns were -7.55% for TLT, -4.23% for IEF and +0.64% for SHY [3][4][5].
Price charts for these funds are on DataPorium's ETF pages, for example TLT, IEF and SHY.
Why was 2022 so bad for bonds?
2022 combined low starting yields with a fast rise. The 10-year Treasury yield went from 1.52% on December 31, 2021 to 3.88% on December 30, 2022, and the 30-year from 1.90% to 3.97% [1]. The Fed raised its target range seven times that year, from 0%-0.25% to 4.25%-4.50% [1].
Low starting yields meant two problems at once. Duration is higher when coupons are low, so prices were more sensitive, and there was little interest income to cushion the price loss. TLT lost 31.41% in 2022 and IEF 15.23%, while AGG, a broad investment-grade index fund, lost 13.06% [3][4][6].
The same arithmetic applies to banks. The Federal Reserve's review of Silicon Valley Bank found that the bank managed interest rate risk with a focus on short-run profits, removed interest rate hedges, and was exposed to rising rates in 2022 and early 2023; after depositors withdrew more than $40 billion on March 9, 2023, the bank was closed on March 10 [7].
Bond prices fall when yields rise because a fixed coupon must be repriced to match the market, and duration tells how far: about 1% per year of duration for each 1-point change in yield.
Does duration matter if a bond is held to maturity?
For a single bond, the price swings are on paper if the bond is held to maturity and the issuer pays: the holder still receives every coupon and the face value. FINRA notes that buy-and-hold investors may see little direct impact from rate changes [2]. The cost is an opportunity cost: the money stays locked in at the old, lower coupon.
A bond fund has no maturity date. It keeps buying new bonds to hold its duration near a target, so its price does not return to a fixed amount. Higher yields do raise the income a fund earns on new purchases: as of October 9, 2026, TLT's average yield to maturity was 5.66%, against a 12-month trailing yield of 5.00% [3]. That extra income accrues for as long as the fund holds the higher-yielding bonds, which is how a fund gradually earns back part of a price drop if yields stay put.
Key takeaways
- Price and yield move in opposite directions: a 10-year 4% bond falls 7.8%, to $922.05, if its yield rises from 4% to 5%.
- Duration estimates the move: about 1% per year of duration for each 1-point change in yield; TLT's duration was 14.69 years and SHY's 1.82 years on October 9, 2026 [3][5].
- Convexity makes gains larger than losses: the same bond gains 8.6% if yields fall 1 point but loses 7.8% if they rise 1 point.
- With the 10-year yield up from 4.16% to 5.29%, TLT returned -8.88% and SHY +1.47% in the 12 months to September 30, 2026 [1][3][5].
- In 2022, when the 10-year yield rose from 1.52% to 3.88%, TLT lost 31.41% and AGG 13.06% [1][3][6].
Frequently asked questions
How much does a bond fall when interest rates rise 1%?
Roughly its duration in percent. A bond or fund with a duration of 10 falls about 10% when yields rise 1 percentage point [2]; a 10-year 4% Treasury falls 7.8%.
What is a good duration for a bond fund?
It depends on how much price movement an investor can accept. As of October 9, 2026, iShares Treasury funds ranged from 1.82 years (1-3 year bonds) to 14.69 years (20+ year bonds), and the broad AGG fund was at 5.69 years [3][5][6].
Do bond prices go back up after rates rise?
An individual bond's price moves back toward face value as it nears maturity. A fund's price recovers only if yields fall, but higher yields raise its income: TLT's average yield to maturity was 5.66% on October 9, 2026 [3].
Why did long-term bonds lose more than 30% in 2022?
Yields started near record lows and rose fast: the 10-year went from 1.52% to 3.88% during 2022 [1]. Long bonds have the highest duration, and TLT lost 31.41% that year [3].
Sources & References
- [1] DataPorium Interest Rates (daily Treasury yields and Fed rate decisions)
- [2] FINRA, Brush Up on Bonds: Interest Rate Changes and Duration (September 19, 2024)
- [3] iShares, iShares 20+ Year Treasury Bond ETF (TLT) fund page (accessed October 13, 2026)
- [4] iShares, iShares 7-10 Year Treasury Bond ETF (IEF) fund page (accessed October 13, 2026)
- [5] iShares, iShares 1-3 Year Treasury Bond ETF (SHY) fund page (accessed October 13, 2026)
- [6] iShares, iShares Core U.S. Aggregate Bond ETF (AGG) fund page (accessed October 13, 2026)
- [7] Board of Governors of the Federal Reserve System, Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank (April 2023)