Dear Dr. Don,
My bond fund has decreased in value recently. Why? Please explain yields in general and also please tell me what’s up with the 10-year Treasury note.
— Bruce Bonds
While you are the first to write me with this question, I expect readers are wondering what’s gone wrong with their bond funds when they look at their investment account statements.
The key thing to remember is when interest rates go up, bond prices go down. The 10-year U.S. Treasury note has seen its yield rise substantially over the past month, reaching a high of 2.74 percent. That’s up from about 2.08 percent in the beginning of June. That change in yield would result in about a nearly 6 percent drop in price.
The reverse is also true. When interest rates go down, bond prices go up. Long-term Treasuries have been in a nearly three-decade bull market, with rising prices. The long bull market in bonds is likely to end one of these days.
A long-term bond fund manager isn’t paid to hide out in short-term debt instruments or cash. Take a look at your bond fund’s prospectus to see in which kinds of maturities and securities the manager is supposed to invest.
You can always hold shorter-term funds. If the funds are held in a taxable account, there will be tax implications related to such a change.
While conventional wisdom suggests long-term interest rates should trend higher, we don’t really know where interest rates are headed. A crisis somewhere around the world could bring money into U.S. Treasury securities, raising their prices and lowering their yields.
A diversified portfolio of bonds or a laddered bond portfolio might make the most sense right now, instead of trying to time the market.
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