How does bond market volatility occur?

Bond holders who collect coupons and hold the bonds until maturity are not subjected to market volatility, as the principal and interest payments occur to a pre-determined and well-defined schedule.

However, bond holders who buy and sell their bonds before maturity are subjected to a number of risks; the most significant of which is changes in national interest rates. When these interest rates increase, the value in the existing bond falls, as any newly issued bond will pay a lower yield. So we can see there is an inverse correlation between bond prices and interest rates. As interest rates fluctuate, as a natural part of a country’s monetary policy, the bond market experiences volatility in a reaction to this activity.