Unfortunately, those of us who lived through the rising interest rate environment I the late 70s are dying off so the number of stories about that time diminish. Perhaps fewer people studying math who can interpret the unambiguous mathematics of bond risk which are analytically simpler than equity risk and quite determinative.It would be great if we invested in bond funds and never needed to actually spend our money because then we could feel a lot better about the whole situation when we have a bad year like BND down 13% in 2022.Surely you know this supposedly bond bear market has null effect over the long term. Bond funds contain fixed income instruments, so they pay fixed dividends followed by return of principle at maturity. No matter how market yield changes at a particular maturity you still get the same revenue stream and return of principle. If net asset value goes down, then:
constant revenue stream / lower net asset value => higher perceived yield
If net asset value goes up, then:
constant revenue stream / higher net asset value => lower perceived yield
Only way you lose is if you sell out your bond position after a net asset value drop.
In my mind the recent bear market reinforces the importance of understanding the risks of owning bonds in a rising interest rate environment. One path to deal with those risks is to reduce the duration of your bonds to align with your risk tolerance and when you may need your money. I personally like a 5 year treasury ladder for those reasons to physically and psychologically stay the course.
Statistics: Posted by jebmke — Sat Jul 20, 2024 5:49 am — Replies 5 — Views 767