recent performance TBM vs 10 yr UST, risk of higher rates

[letsgobobby]

There has been speculation for some time that we are in a bond bubble, and that when rates rise bonds will be (decimated, pulverized, annihilated, whatever descriptive/destructive turn of phrase you care for).

The 10 yr treasury yield recently bottomed at 1.39 on July 25. It is now at 1.70, a notable increase of 22.3% in a relatively short time (5 months).

During this same time period, Google Finance shows that BND (Vanguard TBM ETF) has fallen by only 1.58%. I realize this does not include coupon payments and wonder if all following discussion should actually include those, but the data was not available to the precise date at Morningstar.

My questions are 1. Is this the proportional response that bond doomsayers have been afraid of (ie, a 20% increase in treasury yields will lead to a 1.5% decrease in the price of bonds) and 2. What are the explanations for the relationship between 10 yr treasury yield : TBM price being 20 : 1.5 as opposed to, say 20 : 3? With respect to the second question I suppose the answer includes comments such as "TBM includes not only treasuries but also ABS, corporate bonds, and not only 10 year maturities but both longer and shorter as well." But if you can add anything else as to why the numbers work out the way they do, I would appreciate it.

Finally, is the following statement correct? If not, is there any kind of 'blanket statement' that one could make with respect to the 10 yr treasury yield vs TBM pricing?:

"if the yield goes up 223% (10x its recent increase) then the decrease in BND pricing will be 15.8% (10x its recent decrease)."

Thank you!

[kenyan]

I don't think you should be using percentage increases on the yield in that manner. What is important is that a there was a rise of 0.31%; the fact that it started at 1.39% isn't important. An increase of 0.31% multiplied by the duration of 5.2 years for TBM is a 1.61% decrease in principal (obviously, TBM is not composed exclusively of these instruments, and there are other factors involved).

Talking about large percentage changes of very low percentages can be misleading. It's akin to when someone gets excited about their index fund lowering expenses from 8 to 4 basis points. "My expenses lowered by 50%!" Well, yes, but the important part is that your expenses went down by 4 basis points, not by 50%. That's the difference you actually experience. It's no different than if a 1.00% ER portfolio dropped to 0.96% ER, even though that was a meager 4% decline in ER, not 50%.

[letsgobobby]

good point.

so if yields actually rose by 220%, or from 1.39 to 4.5%, you are suggesting that TBM might fall by, say, 3.1 x 5.2 = 16.12%? Wait a second, that's almost the same as the 15.8% I calculated using my made up method.

[jjustice]

I suppose that it is theoretically possible to loose a lot of money quickly in a fund like TBM, but I doubt that is the danger that is feared. What people are worried about is slowly losing money in real terms over a period of several years. TBM is not likely to do sudden damage.
John

[dbr]

I suppose that it is theoretically possible to loose a lot of money quickly in a fund like TBM, but I doubt that is the danger that is feared. What people are worried about is slowly losing money in real terms over a period of several years. TBM is not likely to do sudden damage.
John

I agree with the above anlaysis of reality, but to read on this forum I think there truly are people who are worried that they are going to be "wiped-out"* in bonds in a short period of time.