What role do interest rates play in fixed income securities?

Interest rates play a crucial role in the valuation and performance of fixed income securities, primarily influencing both their yield and price. When interest rates rise, the prices of existing fixed income securities typically fall, as newer issues must offer higher yields to attract investors. This is due to the inverse relationship between interest rates and bond prices; as rates increase, the fixed payment provided by existing bonds becomes less attractive compared to newly issued bonds with higher yields, resulting in a depreciation of the market value of those existing bonds.

Conversely, if interest rates fall, the prices of existing bonds usually increase because their fixed interest payments become more appealing relative to the lower yields offered by new issuance. This dynamic highlights the sensitivity of fixed income investments to changes in interest rates, making them a key factor for investors to consider when analyzing fixed income securities. Without the influence of interest rates, the returns from such investments would not be accurately assessed, nor would their market values reflect current economic conditions.

Understanding this relationship is essential for managing interest rate risk, which can have significant implications for portfolios consisting of fixed income securities.