Must Bond Investors Fear Rising Interest Rates?
Andrew D. Martin
January 24, 2012
In it, the author attempts to sooth worried investors about the future of bond funds. Among other points, he is attempting to refute this article:
He attempts this by, in part, looking at historical returns for the few bond funds that existed more than 30 years ago.
I have a question (or maybe better put, a misunderstanding) that perhaps this forum can address. Near the bottom of the article, a number of caveats are brought up. One mentions a devastating scenario in the doomsday article:
That article asserted that, if yields on Treasury Bonds rise just 3%,
10-Year Treasurys will decline 23.5% and 30-Year Treasurys will drop 40.7%. The
problem with this is rates would have to rise 3% in one year. Rates have never come
anywhere close to rising 3% in one year – 3% is not “puny.”
Question #1a: In the above, he seems to be interchanging the terms yield and rates. Is that proper?
Question #1b: Is that true?
Then I looked up the article that caused the broohaha in the first place. The quote is accurate. But the article goes on to say:
Inker and GMO are well-known for their seven-year projections for asset classes, which have been very accurate. "Our expected return is that the 10-year Treasury note loses 1.3 percent a year after inflation," says Inker.
Question #2: My takeaway here is that, yes, rising rates are bad for bonds, but these guys don't think that the devastion scenario is going to play out. Am I reading this right?
Question #3: Seems to me that one article is talking about bonds while the other is talking about bond funds. Different animals, right?
I'm hoping the helpful folks here can clear up my confusion.