I watched a video today about bonds and saw how a 10-year note will have its price rise by 9.5% or so if the interest rate drops by 1%.
What I am wondering about is the rationale for trading such a windfall price increase.
That is, if I buy a 10-year note at 4% and the Fed cuts by 1% next year, it seems I could sell the note and make a 9.5% capital gain. However, if I were to want to maintain my fixed income allocation, I would have to buy another bond and it would seem that the price of the new bond would be higher (or the rate lower) cancelling out my windfall profit. It seems this is similar to selling my house as prices rise, only to have to buy a similar house with the proceeds.
Is the idea for doing this sort of trade that the environment that would lead to the Fed cutting rates would include a severe drop in the stock market, so I would be taking the proceeds from selling the 10-year note at a capital gain and buying lower priced stocks instead of replacing the bond?