What influences the price of bonds, and when is it best to buy or sell them?
Bonds are one of the most understandable and reliable instruments: they provide a coupon, have a maturity date, and a clear legal structure.
But unlike a bank deposit, their market price fluctuates during the trading process. This is the key to profit (or loss) when selling before maturity.
Imagine you bought a 5-year Pfizer with a face value of $1,000 and a 5% annual coupon. A year later, the bond's price falls, and the same bond is now trading at $900, with the annual yield rising to 5.5%.
At this point, it's advantageous for the buyer to enter (the yield is higher than before), but not for the seller: they will lock in a loss to the par value. The idea is simple: price and yield move in opposite directions.
Moreover, there's one key rule: the closer the time to maturity, the closer the price to par. This means bonds priced below par appreciate, while those priced above par decline.
What influences the price of government bonds?
The price of government securities depends primarily on inflation and the central bank's key rate . When inflation slows down and the regulator hints at a pause or reduction, yields begin to fall and prices rise .
Long-term bonds benefit the most —their prices react more strongly to rate changes. Therefore, the end of a high-rate period is a classic time to buy as the price rises.
If inflation accelerates and there are signs of further increases, yields rise and prices fall . At such times, it's safer to hold short-term securities (1-3 years): they fluctuate less, and the coupon smooths out fluctuations.
Another undeniable factor that influences the price of government bonds is the credibility of the government . A deteriorating budget, rising debt/GDP, a rating downgrade, and political instability ⇒ a risk premium ⇒ prices down , yields up. An improvement is the opposite.
What influences the price of corporate bonds?
Here, the question of how reliable the company is . The market always demands a risk premium over the yield of government bonds. During periods of instability, this premium increases even for reliable companies—prices fall, and these are often the best places to buy.
When the panic subsides, the price rises and the premium decreases. Also, consider the terms of the issue: if a security is trading significantly above 1,000, and the issuer soon has the right to buy it back at 1,000, the upside potential is limited—it's important to assess the worst-case scenario.
It should be noted that the bond is likely to rise following positive financial reports, so the purchase decision should be made based on the company's performance.
For example, Pfizer entered into and fulfilled several profitable contracts this quarter, which will have a positive impact on the profit report, so the bonds will most likely increase in price after the report is published.
Interest rates of national banks are also a significant factor ; their increase can shift investor interest and cause a decrease in the price of bonds.
It's important to remember: Bonds are not deposits . Discipline is rewarded: first, look at the risks and structure of the issue, then at the coupon and the promised return. Don't chase every percentage point; sometimes, the price increase can exceed the coupon income several times over.
