https://seekingalpha.com/article/4213968-will-bond-investors-statements-show-losses-rising-interest-rate-environmentSummary
Thousands of bond funds are at a loss this year with rising interest rates.
Rates had been falling for decades but now that trend is reversing.
Even many target date funds are down.
We like individual bonds because you know the precise details and when they mature.
What will bond investors do when their statements show losses?
With rising interest rates, bonds and the funds that hold them have taken a hit this year. Why do people invest in bonds? To keep their money safe. With a thirty years of falling interest rates, bond investors are not used to looking at statements with losses.
A bond works like this: bonds are sold in increments for about $1,000. Twice a year, the bond pays a coupon. When the bond matures, the investor is given back the $1,000. If the bond pays $15 twice a year, the total is $30. $30 dividend by $1,000 equals 3%.
When interest rates rise, that 3% may not be so interesting to investors. If you can get 2.5% on a guaranteed Treasury bond, that corporate bond may need to yield 3.5%. At this point, the bond is going to drop in value. It’s no big deal if you have a year to wait to get your principal back. It’s a big deal if you have to wait thirty years. Also, mathematically, the thirty year bond will fall more in value.
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Let’s take a look at a bond that we own. Yum Brands (YUM) (Cusip 988498AG6) matures November 11, 2020. It has a coupon of 3.875, meaning that it pays half of that twice a year--$19.375 every six months. We bought 20 bonds for $20,404.03 on May 20, 2015. We paid a little over $1,000 per bond because interest rates for these bonds were not quite 3.875%. Just a little less so the amount above $1,000 gets evened out by the higher coupon and the fact that you get paid back $1,000 when the bond matures. This is called the yield of maturity.
As of now, we are down $604.03 which equals 2.96%. Counting the coupons we are at a profit but the statement shows a loss which is what we want to concentrate on for now.
Comments
https://www.investopedia.com/terms/g/guaranteedbond.asp
Say I have two bonds, both maturing in two years. Each has a similar yield to maturity (not yield "of" maturity) of 2.8%-2.9%. One is AAA rated by both S&P and Moody's, the other is rated AA+ by S&P, and AAA by Moody's.
Neither one is backed by any third party guarantee (such as bond insurance or in the case of a bank, FDIC). Nor does either come with some sort of special promise (e.g. seniority) by the issuer.
The only promise, "guarantee" if you wish, is the promise by the issuer to make good on the debt. Going by that definition, all bonds are "guaranteed", and the best "guarantee" is the promise from the highest rated creditor.
The two bonds I have in mind:
J&J call make whole note 1.95% 11/10/2020, CUSIP 478160CH5, YTM 2.894% (Fidelity listing) AAA
2 year Treasury, 2.85% YTM (Fidelity table of yields) AA+
Could we stop saying that Treasuries are "guaranteed"? It's just a promise by the issuer; not even a top rated issuer at that, and hardly something like a "money back" guarantee. Okay, maybe it is literally a promise to give you your money back in two years