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Just wondering... If, as an individual, I buy a 10 year US Treasury bond and hold it to maturity I received the face value of the bond as well as the coupon along the way. Now, if I buy a US Treasury Bond Index fund...that trades (sells) very little because it is an index...wouldn't this type of strategy allow the bonds in the fund the opportunity to mature and therefore recieve the face value and the coupon...no loss of share price? I could see share price being impacted by selling longer duration US treasuries early but, if they are held to maturity there no loss of face value.
There are money making strategies for bonds in raising rate environments. Listen to Dan Fuss sometime. One strategy he speak of is to ladder say 10 year treasuries every year...smoothing out coupon payments. So if a bond fund used a strategy of laddered 10 year treasuries...why would that be any different then me doing this myself?
Often, I think its more about the nimbleness or prepositioning of the fund. An index fund should be shortening there duration to preposition...when rates do finally raise they can begin holding longer and longer duration.
"if I buy a US Treasury Bond Index fund...", the fund is marked to market every day and you and other investors can redeem at each day's NAV, which means you can loose a small (or large) fortune should interest rates rise. If a fund is called something like Long Duration Treasury Fund, how nimble do you think the manager could be? He can't buy equities or high yield even if he sees the interest rate freight train coming. the 2% coupons will not protect against a huge loss of capital. And don't forget that as soon as it starts plunging, the investors will want their money back, which means, even if you're very patient and prudent, the fund manager will be selling long bonds before maturity at firesale prices to pay other investors and the fund's value will go down. Never confuse a bond with a bond fund.
Reply to @bee: i am not stating 'stay short duration'. what i am saying -- know what you own and what the risks are. each porfolio needs some equity risk (US and non-US), some interest rate risk, and some credit risk -- diversify your risk sources.
Comments
There are money making strategies for bonds in raising rate environments. Listen to Dan Fuss sometime. One strategy he speak of is to ladder say 10 year treasuries every year...smoothing out coupon payments. So if a bond fund used a strategy of laddered 10 year treasuries...why would that be any different then me doing this myself?
Often, I think its more about the nimbleness or prepositioning of the fund. An index fund should be shortening there duration to preposition...when rates do finally raise they can begin holding longer and longer duration.
Am I missing something here?
Gotcha...always sit close to the exit...I agree with the long duration problem...stay short duration.
http://investorplace.com/2012/12/making-a-case-for-muni-bonds-is-simple-risk-and-return-xom-msft-adp-jnj-pg-hpq/