A reader recently posed a question about whether bonds have the potential to grow in value over time — and the answer may surprise some investors.
In straightforward terms, the underlying dollar value of most bonds simply does not appreciate. With very limited exceptions, the price a bond pays out at maturity — known as par value — stays fixed for the entire life of the bond. Because both the regular interest payments, called coupon payments, and the par value are locked in by contract, there is no room for growth built into the structure.
Historical data backs this up. Looking at price returns — a measure of capital appreciation — versus total returns, which factor in reinvested income payments, across several bond indexes dating back to the 1970s (and early 1980 in one case), the price returns came in close to zero. That means nearly all of the gains investors saw came from yield, not from the bonds growing in value.
That said, bond prices can and do move up or down in the short term based on shifts in market interest rates — even if the final payout at maturity stays the same.
When market interest rates climb, bond prices fall. How much they fall depends on something called duration, which measures how sensitive a bond’s value is to a 1% change in interest rates. A bond with a 5-year duration, for instance, would be expected to lose roughly 5% in value if rates rose by 1%, and gain a similar amount if rates dropped. Bonds with longer durations feel those swings more sharply.
In 2022, when the Federal Reserve launched a series of aggressive rate hikes, long-term Treasury bonds saw price drops exceeding 30%, while other bond categories fell 12% or more.
The opposite effect plays out when rates fall. Back in 1982, the Fed cut rates by nearly 5 percentage points, triggering big price gains for bonds. Long-term Treasuries jumped about 26%, and other bond types posted double-digit gains as well.
Credit quality is another variable that influences bond prices. If buyers grow less confident that a bond issuer will be able to meet its financial obligations after the bond is first sold, they’ll typically only purchase it at a price below par value. That discount creates the possibility of price appreciation if the credit concerns turn out to be exaggerated. On the other hand, a buyer who pays close to par value could see the price drop if the issuer’s financial health weakens.
A skilled portfolio manager might buy discounted bonds and sell them after prices recover, capturing some capital gains along the way. But even the most successful managers are working with thin margins. Consistent outperformance might add a small amount of value above a benchmark index — likely less than one percentage point per year. As one example, Fidelity Investment Grade Bond (FBNDX) posted annualized returns of 2.28% over the trailing 10-year period through April 2026, compared to 1.6% for the Morningstar Category index. Still, any capital appreciation from bonds tends to be modest at best.
It is worth noting that bonds have historically outpaced cash over the long run. Since 1926, intermediate-term bonds have delivered annualized returns of roughly 4.9%, compared to 3.3% for cash. However, that edge comes almost entirely from the fact that bonds typically start with higher yields, not from price appreciation.
Where bonds truly deliver value is in producing steady income and helping to reduce the overall risk level of an investment portfolio. For investors seeking meaningful capital growth, stocks remain the stronger choice.
This article was provided to The Associated Press by Morningstar. Amy C. Arnott, CFA, is a portfolio strategist for Morningstar and co-host of The Long View podcast.
