This week, too, the bond market reacted to signs of a tighter interest rate policy in the USA with sales.

James Bullard, regional president of the American Federal Reserve in St. Louis, had spoken out in favor of raising the key interest rate from the current 0.5 percent to 3.5 percent.

Inflation in the US was 8.5 percent in March.

Even without Bullard's statement, market participants were already expecting a significant increase in key interest rates in America.

But what does an imminent rate hike mean for the bond market?

Antonia Mannweiler

Editor in Business.

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Bonds from states and companies are basically nothing more than loans that are not taken out from a bank but on the capital market.

One of the advantages is that the number of possible donors is much larger.

The bonds can then be traded on the market over the entire term.

Their holders receive interest in a predetermined amount at certain intervals – usually annually – until the end of the term, also known as an interest coupon.

The interest creditors receive from the issuer depends primarily on three factors: the creditworthiness of the issuer, the term of the bond and the interest rate level prevailing on the market.

Creditworthiness is assessed by rating agencies such as Standard & Poor's (S&P) or Moody's.

If a state is or is about to become insolvent, there is a high risk from the investor's point of view that the payments can no longer be made within the term.

The market demands compensation for this risk in the form of a higher interest coupon.

In addition, the level of bond interest is also based on the key interest rate set by central banks such as the Federal Reserve or the European Central Bank.

If interest rates rise in the USA or in the euro zone, the interest coupons on newly issued bonds will also be higher and then be higher than those of bonds already on the market.

Higher coupons make the new bonds much more attractive from an investor's perspective, while demand for older bonds is falling.

So since the yield potential of the new bonds is greater, bonds issued in a lower interest rate environment must become cheaper.

Then their prices fall, possibly below 100 percent of the nominal value.

The price then acts as a kind of balance between the market interest rate and the interest coupon, since the coupon may not be adjusted during the term.

The prices of new bonds, on the other hand, are higher until, ideally, bonds with a comparable term and credit rating bring the same yield.

Otherwise, either the new or the old bond would always be more attractive and investors would exchange them for each other.

So rising interest rates will affect the yields, and therefore what bond investors earn to maturity, on new and outstanding bonds.