Do FHLB Bonds Seem Too Good to be True?

[NomDeER]

If rates continue to climb, you’re stuck with a below market coupon which will drive the value of the bond lower if you need to sell before maturity.

Wouldn't this be true for a newly issued bond as well?

 

[COcheesehead]

Wouldn't this be true for a newly issued bond as well?

Wouldn’t a new issue be at market coupon?

 

[NomDeER]

Wouldn’t a new issue be at market coupon?

Yes, but increasing interest rates still would decrease the value of a new issue bond, wouldn't they? Is there a reason why increasing rates would have different impacts on the values of the two bonds?

In reality, I probably would hold to maturity. That's the benefit of a lower coupon; it's less likely to be called.

 

[Popeye]

Yes, but increasing interest rates still would decrease the value of a new issue bond, wouldn't they? Is there a reason why increasing rates would have different impacts on the values of the two bonds?

In reality, I probably would hold to maturity. That's the benefit of a lower coupon; it's less likely to be called.

The lower coupon bond needs to go further below par to bring its yield up to current market rates.

 

[COcheesehead]

The lower coupon bond needs to go further below par to bring its yield up to current market rates.

Correct.

 

[COcheesehead]

Yes, but increasing interest rates still would decrease the value of a new issue bond, wouldn't they? Is there a reason why increasing rates would have different impacts on the values of the two bonds?

In reality, I probably would hold to maturity. That's the benefit of a lower coupon; it's less likely to be called.

If you are worried about a call, buy a treasury.

 

[NomDeER]

The lower coupon bond needs to go further below par to bring its yield up to current market rates.

Further in terms of the amount of the drop or further in terms of the end point? Won't both have to drop to bring the yield to the current market rate? I understand that the newer issue with the higher coupon wouldn't end up as low as the secondary market with the lower coupon as the secondary market is purchased below par. But, would the amount of the drop in par resulting from an increase in interest rates be greater with one than the other and why would that be?

 

[Popeye]

Further in terms of the amount of the drop or further in terms of the end point? Won't both have to drop to bring the yield to the current market rate? I understand that the newer issue with the higher coupon wouldn't end up as low as the secondary market with the lower coupon as the secondary market is purchased below par. But, would the amount of the drop in par resulting from an increase in interest rates be greater with one than the other and why would that be?

Generally speaking, bonds with lower coupons are more volatile, all else being equal. Maybe peruse this article on Fidelity. It may help clarify things. It gets into something called bond duration.

https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/duration

 

[NomDeER]

Generally speaking, bonds with lower coupons are more volatile, all else being equal. Maybe peruse this article on Fidelity. It may help clarify things. It gets into something called bond duration.

https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/duration

Thanks! That was very helpful. I didn't realize how much the coupon affected duration. Interesting that the interest rates interact with duration both with rising rates and declining rates. So, low coupons could be a good thing depending on what happens with interest rates.

When they are talking about rising interest rates, are they talking about the Fed rate or are they talking about the interest rate corresponding to the bond maturity rate?

 

[COcheesehead]

Thanks! That was very helpful. I didn't realize how much the coupon affected duration. Interesting that the interest rates interact with duration both with rising rates and declining rates. So, low coupons could be a good thing depending on what happens with interest rates.

When they are talking about rising interest rates, are they talking about the Fed rate or are they talking about the interest rate corresponding to the bond maturity rate?

The Fed controls only one rate. All the rest are market determined.