Bonds go down with interest rate hikes?

[USGrant1962]

This thread has illustrated a significant lack of understanding of Fixed Income products and market. A little surprising given the usual competence of this group.

I've learned over the last year that the behavior of bonds is more complicated than it appears. There are a lot of moving parts, and this thread bears that out.

For example, in this article https://www.kitces.com/blog/how-bon...ve-help-defend-against-rising-interest-rates/ Kitces discusses how one year after buying a 5-year note you are sitting on a 4-year note with a 5-year interest rate. So all else being equal the price of the bond goes up. Then later on as it approaches maturity it goes back down to the face value.

So the value of bonds certainly depends on coupon interest rates, but also maturity, duration, the yield curve, inflation, bid/ask spreads, credit risk/ratings, supply and demand (they are sold at auction), and probably some other stuff I left out.

For a simple financial instrument they are not so simple.

 

[Danmar]

I've learned over the last year that the behavior of bonds is more complicated than it appears. There are a lot of moving parts, and this thread bears that out.

For example, in this article https://www.kitces.com/blog/how-bon...ve-help-defend-against-rising-interest-rates/ Kitces discusses how one year after buying a 5-year note you are sitting on a 4-year note with a 5-year interest rate. So all else being equal the price of the bond goes up. Then later on as it approaches maturity it goes back down to the face value.

So the value of bonds certainly depends on coupon interest rates, but also maturity, duration, the yield curve, inflation, bid/ask spreads, credit risk/ratings, supply and demand (they are sold at auction), and probably some other stuff I left out.

For a simple financial instrument they are not so simple.

Right, agree. But still some pretty basic misconceptions here. Probably because most people don’t buy individual bonds anymore, just ETF’s.

 

[audreyh1]

I don’t worry too much when my bond funds take a hit. I’m short and intermediate term anyway, so catch up is just a few years. If equities continue to do well I get to rebalance adding to bonds when they are down. If interest rates rise enough to spook everything, stocks will get hurt more than bonds for a while. Another rebalancing opportunity. Bonds tend to rebound strongly after a bad year. If the economy takes a hit, interest rates drop while stocks are unhappy. Nothing is static. That’s why I love the concept of a target AA and annual/infrequent rebalancing.

 

[NW-Bound]

Great point, it's just that the spending power is greatly diminished when you redeem at maturity. And the entire time you owned it, the interest you collected was less than a comparable investment.

You put enough in to buy a case of beer, and when you redeem at maturity, you get enough back to buy a 6-pack.

+1

People like to say owning individual bonds they will get back their principal at maturity. They choose to ignore the fact that their principal will be worth less, because interest rate and inflation go together.