Shouldn't this drive prices up?

[clatoden99]

Interest rates and Bond Prices are inversely related, but higher interest rates should cause people to purchase bonds, shouldn't this drive prices up?

[kv968]

Higher interest rates could cause people to buy them but they would be buying the newly issued bonds with the higher rates. The older bonds that are already out there with lower rates would see a fall in prices to make up for the yield difference.

For example, if a current 3% bond is selling for $100 and an identical new bond is issued for 4% for $100, why would anyone buy the 3% one when they can get 4% for the same amount of money? Answer is they wouldn't hence the price of the 3% bond would fall until it's yield matches the 4%.

Granted enough people could want the 4% bond that the prices of even those go up (and the 4% yield down) but the inverse relationship of bond prices and interest rates usually pertain to already issued bonds.