What is volatility risk in the context of bond investing?

In the context of bond investing, volatility risk specifically refers to the potential that changes in interest rate volatility can negatively affect bond prices. When interest rate volatility increases, it signifies that interest rates are expected to fluctuate significantly. This variance can lead to uncertainty in the bond market, impacting the valuation of bonds.

For bond investors, increased volatility can cause wider price swings in bonds, making them riskier investments. If interest rates rise, the prices of existing bonds fall, and vice versa. However, in a volatile environment, the reactions of bond prices can be more pronounced and unpredictable, resulting in the risk that an investor may experience significant losses if the market moves against their position.

Understanding this risk is crucial for bond investors because it not only affects the pricing of bonds at any given moment but can also influence the yield curve's shape and overall market trends. Therefore, the correct answer highlights a key aspect of bond market dynamics and the inherent risks associated with fluctuations in interest rates.