Common mistakes about bonds and interest rates

The common belief: A bond or savings account paying 5% is straightforwardly better than one paying 2%, and a positive headline rate means money is growing. On the same theme: the Eco3min framework on how markets form expectations and price risk.

What the data shows: What an investor keeps is the real rate, the nominal rate minus inflation. With U.S. CPI peaking at 9.1% in June 2022 (BLS), nominal yields of 3-4% on cash and short bonds still implied deeply negative real returns that year. The nominal number is the headline; the real number is the outcome.

→ The full explanation: Real vs nominal interest rates explained

The common belief: As long as the rate on cash or short bonds is above zero, purchasing power is preserved.

What the data shows: A nominal rate above zero can still sit below inflation, producing a negative real rate that erodes capital. According to Federal Reserve estimates (Waller, May 2024), the real 10-year Treasury yield fell to roughly -2% in 2020-2021, so holders of nominal government debt were losing purchasing power even while being “paid.” Financial repression of this kind is a documented historical mechanism, not a glitch.

→ Full breakdown: Consequences of negative real rates

The common belief: The term structure simply records what each maturity yields today, with no information content beyond a price list.

What the data shows: The curve encodes expected future short rates plus a term premium, and its slope has historically preceded recessions. The 10-year minus 3-month spread inverted before every U.S. recession since the late 1960s (FRED, series T10Y3M), making the curve a forward-looking signal rather than a static table.

→ Fuller explanation: What the term structure of interest rates is · often confused with the inversion signal itself (why the yield curve inverts)

The common belief: Because a bond repays its face value at maturity, holding bonds cannot produce losses the way equities can.

What the data shows: Bond prices and yields move inversely, so an investor who must sell, or who marks to market, before maturity can lose substantially when rates rise. As the Fed lifted the funds rate by 525 basis points between March 2022 and July 2023, the Bloomberg U.S. Aggregate fell about 13% in 2022 (CNBC, January 2023). Capital is returned at maturity in nominal terms only; the interim path and the real value are not guaranteed.

→ Extended explanation: Why bond prices fall when yields rise

The common belief: Longer maturities usually offer higher yields, so they are simply the more rewarding choice.

What the data shows: Longer maturity means higher duration, the sensitivity of price to rate moves. In 2022, long-dated U.S. Treasuries tracked by a long-term zero-coupon index lost 39.2%, far more than the broad bond market, precisely because their duration amplified the rate shock (CNBC, citing E. McQuarrie, January 2023). Higher yield is compensation for that interest-rate risk, not a free upgrade.

→ The complete explanation: What duration is and why it matters

The common belief: Duration fully captures how a bond’s price will respond to changes in interest rates.

What the data shows: Duration is a linear approximation that breaks down for large rate moves; convexity captures the curvature it misses. For the outsized rate swings of 2022-2023, when the 10-year yield travelled from below 2% to above 5%, duration alone understated losses on the way up and gains on the way down. Convexity is generally favourable to the holder, which is part of why it is a documented feature of bond pricing rather than a footnote.

→ Full account: How convexity works for bondholders

The common belief: Treasuries are called the risk-free asset, so they carry no real risk.

What the data shows: “Risk-free” refers narrowly to default risk for a holder to maturity in nominal terms. It excludes interest-rate risk and inflation risk, both of which were severe in 2022 when the safest government bonds posted record losses and negative real returns. The label describes one dimension of safety, not the absence of risk.

→ Complete breakdown: Is the risk-free rate really risk-free?

The common belief: Long-term yields move mechanically with the federal funds rate the Fed controls.

What the data shows: The Fed sets the overnight rate directly, but long yields reflect expected future short rates, inflation expectations and a term premium. What ultimately matters for valuation is the real yield: according to Fed estimates (Waller, May 2024), the real 10-year yield rose from about -1% in 2021 to nearly +2% by early 2024, a swing driven by far more than the policy rate alone.

→ Complete explanation: Why real yields matter more than nominal

The common belief: TIPS are indexed to inflation, so they automatically gain when inflation accelerates.

What the data shows: TIPS compensate for realized inflation through their principal, but their price still moves with real yields. When real yields rose sharply in 2022, broad TIPS indexes posted negative total returns despite multi-decade-high inflation (Schwab, April 2026), because the real-yield shock outweighed the inflation accrual on longer maturities. The protection is against inflation, not against rising real rates.

→ Detailed explanation: How TIPS work mechanically

The common belief: The 10-year yield is a domestic American rate with limited relevance elsewhere.

What the data shows: The 10-year Treasury is a global benchmark that anchors mortgage rates, corporate borrowing costs and asset valuations worldwide. When it crossed 5% on 19 October 2023 for the first time since July 2007 (Reuters), the move rippled through equities, mortgages and emerging-market funding. It is closer to a worldwide reference price than a local statistic.

→ In-depth explanation: How the 10-year Treasury yield affects the economy

The common belief: A 10-year yield is simply the market’s forecast of average short-term rates over the next decade, so if you know the rate path you know the long yield.

What the data shows: Long yields also embed a term premium, the extra compensation investors demand for holding duration. The New York Fed’s ACM estimate was frequently negative in the mid-2010s and again in 2019-2021, then turned positive in October 2023 for the first time since 2021, contributing to roughly 100 basis points of the rise in long yields that summer (NY Fed; Fed FEDS Notes). A decade of textbooks written during negative term premium quietly assumed it away; its return is what makes recent long-rate moves hard to explain by the expected-rate path alone.

→ The full explanation: What the term premium is and why it was negative

The common belief: Government debt sales are routine plumbing with no effect on prices.

What the data shows: Auction size, demand and the resulting supply of duration influence yields, particularly when issuance is rising. During 2023, heavier Treasury issuance and a divided fiscal outlook were cited among the forces pushing the term premium and long yields higher (Reuters, October 2023). The supply side of the bond market is a price input, not just a logistical detail.

→ Full breakdown: Why Treasury auctions move markets