Yes, bonds can lose value, and sometimes the drop is sharp. A 10-year Treasury with a modified duration near 8 would fall roughly 8% in price if market rates rose a single percentage point, and that’s before you factor in credit downgrades, inflation, early calls, or the difficulty of finding a buyer when you want out. Holding a bond to maturity sidesteps some of these losses but not all of them, and plenty of investors never make it to the maturity date.
Rising Interest Rates Push Bond Prices Down
The biggest force moving bond prices is the direction of market interest rates. When rates climb, newly issued bonds pay higher coupons, and older bonds locked in at lower rates have to be discounted to compete. When rates fall, older bonds with higher coupons become more valuable and their prices rise.
Picture a $20,000 bond paying 3% while comparable new bonds pay 5%. Nobody will pay you face value for the 3% bond when a 5% version is available at par. The price of your bond drops until the yield a buyer earns matches the going rate. That adjustment is immediate in the secondary market.
Duration Tells You How Much a Price Will Move
Duration is the standard shorthand for how sensitive a bond’s price is to a rate change. A bond with a duration of 6 is expected to lose about 6% if rates rise one percentage point and gain about 6% if they fall by the same amount.1Raymond James. Duration and Convexity – Fixed Income Bond Basics
Duration is almost always shorter than maturity because coupon payments return some of your money along the way. The S&P U.S. Treasury Bond Current 10-Year Index reported a modified duration of about 8.09 in early 2026, so a one-point rate rise would clip roughly 8% off a 10-year Treasury’s price, not 10%. On a $100,000 position, that is still a serious hit.
Longer-dated bonds take bigger swings. A 30-year Treasury can carry a duration above 18, meaning a 1% rate jump could cut its price by nearly a fifth. Short-term bonds with two- or three-year maturities barely move under the same scenario. Investors who want their bond allocation to stay stable usually lean short for that reason.
Check Yield to Maturity, Not Just the Coupon
Once a bond trades below face value, the coupon rate stops telling the full story. Yield to maturity captures the total return you would earn buying at today’s price and holding until the issuer pays the principal back, factoring in the coupons, the discount, and the time left. Two bonds with the same coupon can carry very different yields to maturity if one trades at a bigger discount. On the secondary market, yield to maturity is the number to compare.2U.S. Securities and Exchange Commission. Bonds or Fixed Income Products
Credit Downgrades and Default
A bond is only as good as the entity standing behind it. Rating agencies grade issuers using measures like debt-to-EBITDA, interest coverage, and cash flow.3S&P Global. Understanding Credit Ratings A downgrade from investment grade to high-yield pushes the market price down because investors now demand more yield for the added risk. Even a one-notch downgrade within investment grade can shave a few percentage points off a long-duration bond.
If the issuer misses a payment or files for bankruptcy, the market value can collapse toward pennies on the dollar. Recovery depends on where the bond sits in the capital structure. S&P Global data shows senior secured bonds have averaged recoveries near 58 cents on the dollar, senior unsecured near 45 cents, and subordinated debt below 30 cents. Bankruptcy cases can drag for years, with no certainty about the final payout while you wait.
Inflation Erodes What Your Payments Buy
Inflation is quieter than a downgrade but can do the same damage over time. A bond paying $50 a year buys less every year prices rise. If your bond yields 4% while inflation runs at 5%, you lose 1% in real terms annually, and that negative real return compounds across both the coupon stream and the principal you eventually get back.2U.S. Securities and Exchange Commission. Bonds or Fixed Income Products
High inflation hurts prices in the secondary market too. Investors rotate out of fixed-rate bonds into assets that keep pace with rising costs, and the selling pressure drags prices down. Central banks typically raise rates to fight inflation, so you often get hit twice: real payments shrink while market prices fall.
Treasury Inflation-Protected Securities adjust their principal with the Consumer Price Index, so coupons rise with inflation and the final payout is the greater of the inflation-adjusted or original principal.4TreasuryDirect. Treasury Inflation-Protected Securities (TIPS) TIPS come in 5-, 10-, and 30-year maturities. Series I Savings Bonds pair a fixed rate with a semiannual inflation adjustment; for I Bonds issued between May and October 2026, the fixed rate is 1.10% and the semiannual inflation rate is 1.43%.5TreasuryDirect. Series I Savings Bond Interest Rates I Bonds have purchase limits, a 12-month holding minimum, and a three-month interest penalty if redeemed within five years. Neither TIPS nor I Bonds outperform in a disinflationary stretch, but they take the inflation guesswork off the table.
Call Risk Can Pull a Good Bond Away Early
Many corporate and municipal bonds include a call provision allowing the issuer to redeem the bond before maturity, usually after a set number of years. Issuers call when rates fall and they can refinance cheaper, the same way homeowners refinance mortgages. For you, the result is losing an above-market coupon and having to reinvest in a lower-rate environment.6FINRA.org. Callable Bonds – Be Aware That Your Issuer May Come Calling
Call provisions also cap your upside. When rates drop, a non-callable bond’s price rises freely to reflect its above-market coupon, but a callable bond’s price stalls near the call price because the market expects the issuer to redeem rather than keep paying. Callable bonds sometimes carry slightly higher coupons to compensate, but if you don’t check the yield-to-call before buying, you can badly overestimate what you will actually earn.2U.S. Securities and Exchange Commission. Bonds or Fixed Income Products
Illiquidity Costs You When You Try To Sell
Not every bond is easy to sell. U.S. Treasuries trade in huge volumes with tight bid-ask spreads. Corporate bonds, especially from smaller issuers or lower-rated names, often trade infrequently and carry wide spreads. Investment-grade corporate bonds typically see spreads around 40 basis points, junk-rated bonds can run above 100, and distressed issues wider still. That spread is an invisible cost that comes straight out of your proceeds.2U.S. Securities and Exchange Commission. Bonds or Fixed Income Products
Liquidity tends to disappear exactly when you need it. In a flight to safety, investors dump corporate bonds and crowd into Treasuries, pushing corporate spreads wider. If you need cash fast and own an illiquid bond, you may have to accept a price well below what you think it’s worth.
Holding to Maturity Versus Selling Early
A price drop only becomes a realized loss when you sell. Hold to maturity and if the issuer pays, you receive the full face value regardless of what the market did along the way. Those interim swings are paper losses.2U.S. Securities and Exchange Commission. Bonds or Fixed Income Products Easier said than done, of course. If life forces you to sell during a rising-rate stretch, the loss gets locked in.
Selling on the secondary market also means paying transaction costs. Broker-dealers charge markups when they sell to you and markdowns when they buy from you, usually built into the price rather than listed separately. FINRA’s general guideline requires those charges to be fair and reasonable, and bond markups are customarily lower than stock markups, but the exact bite varies with bond type, trade size, and market conditions.7FINRA.org. FINRA Rule 2121 – Fair Prices and Commissions On a thinly traded corporate bond, the markdown alone can meaningfully reduce what you walk away with.
Claiming a Bond Loss on Your Taxes
Sell a bond for less than you paid, and the IRS treats the loss as a capital loss. Held more than a year, it’s long-term; a year or less, short-term. Report it on Form 8949 and Schedule D.8Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Capital losses first offset capital gains of the same type, and then up to $3,000 of excess losses can offset ordinary income each year ($1,500 if married filing separately). Anything beyond that carries forward to future years indefinitely.8Internal Revenue Service. Topic No. 409, Capital Gains and Losses After a large loss, that $3,000 annual cap can mean several years of deductions before you use it up.
Watch the wash sale rule. Sell a bond at a loss and buy a substantially identical bond within 30 days before or after, and the IRS disallows the loss, adding it instead to the basis of the replacement bond.9Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The statute covers “stock or securities,” and bonds qualify. Selling one Treasury and immediately buying another with substantially identical terms can trigger it. A different issuer or materially different maturity generally avoids the problem.
One more wrinkle. If you sell between coupon dates, the buyer pays you for interest accrued since the last payment, and that accrued interest is taxable to you as ordinary income rather than running through the capital gain or loss calculation.10Internal Revenue Service. Instructions for Schedule B (Form 1040)