short term bond funds

[eytonxav]

Does anyone have a feel for what will happen to short-intermediate term bond funds (eg Pimco total return) if interest rates start to rise. Certainly longer term bond funds will be very hard hit, but what about these shorter term funds that have excellent fund managers. Will there be a dramatic drop in share price or minimal? If one were to put 45% of a $400K portfolio in fixed income, what would you be comfortable with to get a reasonable return, with little/no downside risk of original amount invested?

Thx,

DFW M5

 

[steve mcgarret]

Intermediate term bond funds will be hurt less than long term funds and short term funds will be hurt even less

The rule everyone uses is: Multiply the average duration of the bond fund by the increase in interest rates. That will give you the amount the NAV can be expected to decrease.

For example, a bond fund has an average duration of 3 yrs. Alan greenspan raises interest rates (over some period of time, hopefully not overnight) by 2%

The NAV of the bond fund will fall by 6%. $100,000 bucks in that fund would fall to $94,000. Also, over time the yrold of the fund would begin to rise because the the portfolio would be acquiring newer, higher yirld bonds and the older , lower yielding bonds in the portfolio would be retired.

 

[eytonxav]

Thanks Steve! When a fund is termed a short -term bond fund, what sort of duration does this typically mean?

 

[Bob_Smith]

Vanguard's Short Term Corporate was 2.5 years duration as of 8/31.

Vanguard's Short Term Bond Index fund was also 2.5 years on 8/31.

Vanguard's Total Bond Mkt. Index (an intermediate fund) was 4.6 years duration on 8/31.

 

[steve mcgarret]

Bob's right. The data I see centers on the numbers: 3 yrs or less for a fund calling itself "short term", and 3 to ABOUT 5 yrs for funds selling themselves as intermediate term. Technically I belive Bond traders call anything 10 yrs or longer a "long term bond" but I dont think you'll see any intermediate term bond funds with average durations much above 5 yrs