Why do interest rates rise and fall?
A – The biggest reason is investors’ fear of inflation. Inflation, defined as an increase in the general level of prices in the economy, reduces the value of fixed-income investments by eroding the purchasing power of each dollar of interest and principal. Investors will demand higher interest to compensate them for the loss of purchasing power. That explains why at any given moment interest rates usually are higher on long-term bonds, where the outlook for inflation is more uncertain, than on short-term bonds.
