Why do fixed income returns fall when interest rates increase?

Sam Osborne, Director of Capital at PE Capital tells us why:

 

It seems strange to think that an asset linked to a fixed return such as fixed income falls in value when the very measure that the asset is linked to, interest rates, is rising.  Here's why.

 

When market interest rates increase, for example, when the RBA or Federal Reserve increases cash rates, the value of the bond the investor is holding decreases.  This is because investors are able to achieve better returns by purchasing other investments which reflect the new, higher interest rate.  A fixed rate bond yield, such as available through the PE Capital Y Fund, is more valuable as interest rates decrease as the investor receives a fixed rate of return while other new bonds on issue are offering lower rates of return as a result of the decrease in interest rates.