timwalsh300
Recycles dryer sheets
- Joined
- Nov 7, 2009
- Messages
- 131
I'm new to investing in bond funds. Tell me if I'm missing something here...
It is my understanding that a bond fund's NAV falls by 1% for every year of the fund's duration when interest rates rise by 1%.
For example, the yield on VFITX (intermediate-term Treasuries) is 2.2% and the duration is 5.1 years. So if rates go up by 1% it will take ~28 months to get back to even in that fund. Similarly VFISX (short-term Treasuries) has a yield of 0.74% and a duration of 2.1 years, so it would ~34 months to get back to even. VUSTX is even worse, requiring ~37 months.
But then there is VFIIX. The yield is 3% and the duration is 2 years. So even if the Fed raises rates by 1% over the next 12 months, VFIIX still returns 1%?
So is VFIIX a free lunch? Or is this just indicative of US Treasuries being tremendously overbought relative to everything else right now? Why? Aren't GNMA's just as safe?
Tim
It is my understanding that a bond fund's NAV falls by 1% for every year of the fund's duration when interest rates rise by 1%.
For example, the yield on VFITX (intermediate-term Treasuries) is 2.2% and the duration is 5.1 years. So if rates go up by 1% it will take ~28 months to get back to even in that fund. Similarly VFISX (short-term Treasuries) has a yield of 0.74% and a duration of 2.1 years, so it would ~34 months to get back to even. VUSTX is even worse, requiring ~37 months.
But then there is VFIIX. The yield is 3% and the duration is 2 years. So even if the Fed raises rates by 1% over the next 12 months, VFIIX still returns 1%?
So is VFIIX a free lunch? Or is this just indicative of US Treasuries being tremendously overbought relative to everything else right now? Why? Aren't GNMA's just as safe?
Tim