No. of Recommendations: 1
However, you have made it clear that your goal is to speculate on interest rates. I understand this to mean that you would like to take advantage of interest movements, by moving in and out of the market...moving in now, when you think that interest rates are relatively high, and moving out, when they drop, and the value of the bonds rise, to achieve a capital gain.

Buying and selling individual bonds costs commissions. If you don't want to pay, to buy and sell, you could hold to maturity...but, by definition, the long bonds would take a LONNNGGGG time to mature. During this time, inflation might resurge, and the value of the bond might drop, so you would have to hold to maturity, to get your principal. You might not want to lock up your money.

However, buying a low-cost index fund, such as from www.vanguard.com, avoids commissions. You have flexibility, to buy and sell, whenever you want.


Wendy,

This isn't correct. Commissions certainly matter, but they aren't going to be enough to make a non-leveraged long bond fund a better choice for trading than a 30-year bond (nor zero), unless you are doing an awful lot of trading in small amounts. Vanguard's commission for "Voyageur" clients is $40 on Treasuries (up to $54,000), so if you buy $20,000, you pay about 1 year's worth of expense ratio on a fund. Even if you buy and sell both ways, it's $80 in commissions.

They key difference is a long bond fund has much lower average maturities (and lower duration) than you get just buying 30-year bonds on your own, then selling them within a few years. The fund, more or less, buys 30-year bonds and keeps them for 20 years.

So, if you were to buy a 30-year Treasury now (or a new one in a few months), then sold it in 2-5 years with coupons down by 100 basis points, you would get a capital gain of around 22%-27% (I didn't crunch the numbers, but that's ballpark). If you buy the Vanguard long treasury fund, with duration of 10.6, and interest rates dropped 100 basis points, you'd be looking at about a 10.6% capital gain.
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