What effect does an increase in the general level of interest rates have on bond prices?

An increase in the general level of interest rates has a direct inverse relationship with bond prices. When interest rates rise, new bonds are issued with higher yields to attract investors. Existing bonds, which were issued at the lower prevailing interest rates, become less attractive because they offer a lower return compared to new bonds. As a result, investors may sell their older bonds, leading to a decrease in their market prices.

This dynamic reflects the fundamental principle of fixed-income investing, where bond prices move inversely to interest rates. If the market interest rates go up, the demand for previously issued bonds diminishes, causing their prices to drop in alignment with the prevailing higher rates. Understanding this relationship is crucial for investors, as it affects their decisions based on anticipated movements in interest rates.