OT: Ping CathyG: Great Video interview on Understanding LT Treasuries Basically, long term treasuries issued at 4 % are
19 percent more valuable than long term treasuries issued at 3%.
This is why your LT Bond fund has done so well...your bond fund price probably appreciated 19 percent as well as you are receiving a 4% interest payment periodically. You are benefiting from the frighten public who are willing to pay 19% more for your collection of higher priced bonds verses what they are willing to pay for the lower priced LT bonds now being issued by the Fed. Moving from 3% to 2% would be a huge
22 percent increase in the value of the 3% LT treasuries and would make a 4% bond
44 percent more valuable.
Calculator Source:
bond-value-calculatorIn a diversified portfolio, your LT treasuries help cushion equities because they often move in the opposite direction to each other. Take a look at VTSMX (Total Stock Market) and EDV (Extended Duration Bonds)...they are almost a mirror image of one another.
If you owned both and rebalanced periodically you would be achieving what some allocation (conservative, moderate, balanced) fund managers try to achieve. How much you own of each kinda determines your risk/reward. In this environment I am not sure these rules still apply. In the future, as rates reverse higher, laddering individual bonds will make more sense and bond funds will suffer price depreciation.
Here's an interview you might like on the topic:
wealthtrackextra.com/full-episode-archive/2012/8/3/robert-kessler.html
