But what happens if interest rates unexpectedly rise by a significant amount, say 4 percentage points across the yield curve? Such a move has happened only twice in the United States, once in 1980 and again in 1981, as the Federal Reserve drove interest rates higher in an effort to combat high inflation. But in relative terms, if interest rates jumped from to , that rise would constitute a 140% change in rates—a change that has never occurred in the United States, and one that would be truly significant. Figure 1 demonstrates the hypothetical impact of a 400-basis-point increase in interest rates on an investment linked to the broad . bond.
