The basic principal with interest rates is simple. When economic growth is strong and inflation is rising, the Reserve Bank of Australia will increase interest rates in an attempt to slow the growth and ease inflation.

As interest rates rise, new bonds are issued with higher coupon rates. This means that the new bonds return more than older bonds already issued. This then causes the existing bonds to have less demand as the interest paid is less attractive and the price will drop.

In addition, this might also cause investors to move some of their investment away from bonds into other more growth assets like stocks and property.

The opposite of this scenario is when the economy is shrinking. In this case the RBA will reduce interest rates to stimulate growth. This means that new bond issued will have a lower coupon rate and previously issued higher coupon bonds will become more sought after and prices of them will raise.

The simple principal are that rising interest rates decreases the price paid for the bond which will increases the yield. Falling interest rates on the other hand raises the price of the bond which reduces the yield.

If you’d like to know more about bonds and how they work in the market, you can find the full details in introduction to understanding bonds.