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pauleckler: thanks for the reply. Wow, the NAV chart for NQS exactly tracks the analyst's description for the 2004 season.

>The shares pay monthly interest at essentially a fixed rate (it varies >by pennies per year over time). Hence, the share price translates >directly to changes in yield.

I assume this "monthly interest" is actually a dividend, as opposed to the less-regular capital-gains distributions made by bond funds? In which case my original puzzlement remains: while the secondary-market value of the securities held by the fund certainly falls as the prime rate rises, the periodic interest payments received from those securities remain unaffected. So why should the monthly dividends made by the fund suffer (unless the fund manager is regularly selling those securities at a loss)?

Also, the total return for NQS in 2004 was "market return 5.96%, NAV return 7.14%". Does this mean a total return of 13%? If so, I'd say not too bad for a bond fund in a rising-rate environment.

Here are a couple other observations about the NQS chart for 2004. First, the NAV fell off the cliff beginning April 1, then climbed almost steadily until flattening in October. The actual FOMC raises were on June 30, Aug 10, Sept 21, Nov 10, and Dec 14. In other words, the market's reaction was well in advance of the first raise and was not clearly tied to any specific raise thereafter.

Second, the duration of NQS is about 10 years. Using the rule that loss of fund value is approximately rise in interest rate times duration, the decrease in NAV between the start of the year and the end (when the total FOMC raises were 1.25%) should have been 12.5%. But the NAV fell only about 5% ($15.50 to $14.80).

I guess my overall sense here is that bonds may seem simple, but ain't!
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