Lsbcal
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Just thought I'd mention a small simple spreadsheet tool I created to try to visualize what goes on when rates rise. I just wanted to get a feel for how an intermediate term bond fund and a short term bond fund might react to a rate rise. This might help me to set my expectations with some actual numbers.
The inputs which can be changed for each fund are:
1) the fund duration
2) the fund's current SEC yield
3) the years the rate rise takes to play out
You can see one run of this below. In this chart there are 3 funds. Fund1 and fund2 both have a 5 year ramp of 3% total rise which are shown in the dashed red and dashed green (scale on right). Their outcomes are shown in solid red and solid green (scale on left). The outcomes show the total returns for the holding period. So for example, fund2 (green solid line) ends up at a 12.5% after 7 years of simulation (CAGR = 1.7%). Fund3 (blue dashed and solid lines) is just the same as fund1 but has a quicker ramp of 3 years to get the full 3% rate rise.
The bottom line total returns are shown in the green part of the table. Notice how the outcomes for the short and intermediate funds are quite similar for an identical rate rise. Also we see how a sharper rate rise (compare blue to red lines) could lead to some negative returns in early years but a better outcome over the entire period -- because once we get to the higher rates we get their benefit longer.
Caveats: Nobody knows when the rate rise might occur or how quickly it might go up. Especially for an active bond fund, the duration and holdings risk trade-offs could change over the years. The rates might rise differently for short and intermediate term bonds. And there are more known unknowns as well as (gulp) unknown unknows.
If someone wants to play with this I could send them the Excel file. Just PM me with your email address.
Comments and suggestions welcome.
The inputs which can be changed for each fund are:
1) the fund duration
2) the fund's current SEC yield
3) the years the rate rise takes to play out
You can see one run of this below. In this chart there are 3 funds. Fund1 and fund2 both have a 5 year ramp of 3% total rise which are shown in the dashed red and dashed green (scale on right). Their outcomes are shown in solid red and solid green (scale on left). The outcomes show the total returns for the holding period. So for example, fund2 (green solid line) ends up at a 12.5% after 7 years of simulation (CAGR = 1.7%). Fund3 (blue dashed and solid lines) is just the same as fund1 but has a quicker ramp of 3 years to get the full 3% rate rise.
The bottom line total returns are shown in the green part of the table. Notice how the outcomes for the short and intermediate funds are quite similar for an identical rate rise. Also we see how a sharper rate rise (compare blue to red lines) could lead to some negative returns in early years but a better outcome over the entire period -- because once we get to the higher rates we get their benefit longer.
Caveats: Nobody knows when the rate rise might occur or how quickly it might go up. Especially for an active bond fund, the duration and holdings risk trade-offs could change over the years. The rates might rise differently for short and intermediate term bonds. And there are more known unknowns as well as (gulp) unknown unknows.
If someone wants to play with this I could send them the Excel file. Just PM me with your email address.
Comments and suggestions welcome.