Bonds have been slipping this year as interest rate expectations shifted, with even the supposedly safer holdings caught in the wave. In reality, bonds are behaving exactly as designed – and the same mechanics behind that fall could soon pay off for you. Here’s how.

Back to basics: How do bonds work?

When you invest in a bond, you are lending to a government or company. In return, you receive regular interest – the coupon – plus your principal back at maturity i.e. when the bond expires. Those payments are contractual, which is why bonds are called “fixed income”.

Between now and the maturity date, prices fluctuate – with an inverse relationship to interest rates. When rates rise, newly issued bonds carry higher coupons, making older, lower-coupon bonds less attractive – so their prices fall. The reverse happens when rates fall.

Central banks guide short-term interest rates to meet economic