Noticed when stocks go down my FXNAX Bond fund usually goes up

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thelateinvestor43
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Joined: Fri Nov 15, 2019 2:02 am
Location: Westbrook, Maine

Noticed when stocks go down my FXNAX Bond fund usually goes up

Post by thelateinvestor43 » Fri Feb 14, 2020 1:31 am

I've noticed that when my equities go down usually my FXNAX bond index fund goes up and vise-versa. What causes this?

fwellimort
Posts: 154
Joined: Tue Feb 12, 2019 9:41 am

Re: Noticed when stocks go down my FXNAX Bond fund usually goes up

Post by fwellimort » Fri Feb 14, 2020 1:41 am

thelateinvestor43 wrote:
Fri Feb 14, 2020 1:31 am
I've noticed that when my equities go down usually my FXNAX bond index fund goes up and vise-versa. What causes this?
FXNAX is a bond fund.
When stock market falls (not always), it can be because the market believes the economy is slowing down.
In that scenario, investors might flee their capital from stocks to the bond market hence increasing the price of bond (supply/demand).
Basically.. there are investors that believe they will have better returns with the bond market than the stock market going forward
(after all, no one knows the future and there are already plenty of doom and gloom investors who constantly yell "recession" or "end of the world stock market", etc. Or maybe.. bonds despite its low yield are just better deals because stock market might never go up for another 5, 10, 15, 20, 30 years)

Another scenario is when interest rates is lowered (or expected to lower over time). When interest rates get lower, current bond prices go up.
Think about it.
Say you have a 10 year bond at 2%. Suddenly, the market sells 10 year bonds at 1.5%.
You can then effectively sell your bond in the market today for (2 - 1.5%)*10=5% more (not really but you get the idea).
So your bond fund which constantly sells old bonds and buys new bonds will effectively get that 5% profit while replenishing its bonds.

And other scenarios are... no idea.
But I hope that answered some of your thoughts about why bonds CAN (not always) go up when stocks go down.

I'm sure there are far more knowledgeable answers out here in Bogleheads but I hope this quick reply eased some of your needs for now.

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Noticed when stocks go down my FXNAX Bond fund usually goes up

Post by rkhusky » Fri Feb 14, 2020 7:59 am

Bonds have low correlation to stocks, so what you think you are seeing is not actually what is happening. Long-term treasuries have the largest negative correlation to stocks (go up when stocks go down and vice-versa) and that is only at a 20% level. Other types of bonds are much closer to 0% correlation (such as your total bond fund), although perhaps some corporate bonds have positive correlations.

If bonds always rose when stocks dropped and vice-versa, the correlation would be -100%.

edit: However, over the last 10 years, the Total Bond correlation is closer to -20% and the Long Treasury correlation is closer to -50%.
Long Corporate has had 0% correlation with the market over the last 10 years.

High yield Corporate has had a +60% correlation with the market (+70% over the last 10 years).

edit2: Over the last 5 years, Total Bond correlation has remained at -20%, while the Long Treasury correlation has dropped to -30%.
Last edited by rkhusky on Fri Feb 14, 2020 8:18 am, edited 4 times in total.

MotoTrojan
Posts: 8210
Joined: Wed Feb 01, 2017 8:39 pm

Re: Noticed when stocks go down my FXNAX Bond fund usually goes up

Post by MotoTrojan » Fri Feb 14, 2020 8:03 am

Maybe you should watch what EDV or TMF do :twisted: .

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