How Do Bond ETFs Perform When Interest Rates Rise?

The Complete Answer

Bond ETF prices generally fall when interest rates rise. The reason is simple arithmetic: when new bonds are issued at higher yields, the older, lower-yielding bonds your fund already holds become less attractive, so their market price drops until their effective yield matches the new ones.

How much a fund drops depends on its duration, a measure of rate sensitivity expressed in years. A fund with a duration of about 6 years (roughly where a total-bond fund like BND sits) loses around 6% of its price for every 1 percentage-point rise in rates, and gains about that much when rates fall. A short-term fund with a duration of 2 years moves only about a third as much.

2022 was the textbook example: the Federal Reserve raised rates rapidly and BND fell about 13% — an unusually painful year for what most people consider the "safe" part of a portfolio. Long-term Treasury funds like TLT fell far more because their duration is much higher.

The silver lining is that falling prices come paired with rising yields, so a bond fund's income recovers as it rolls into higher-paying bonds. If your holding period is longer than the fund's duration, that higher reinvested income eventually offsets the price hit. To limit rate risk specifically, favor shorter-duration funds like BSV or VGSH.