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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35387  
Subject: Re: Bond ETFs Date: 6/30/2005 9:28 AM
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Probably redundant, given other comments....

Bond ETFs are just like regular bond funds in being subject to "interest rate risk." If the bonds owned by the ETF go down in value, because interest rates on equivalent bonds go up, the ETF's share price will go down. If relevant interest rates go down, the share price will go up.

Those selling an ETF short are presuming interest rates on the bonds held by that ETF will go up. The scuttlebutt is that some hedge funds have guessed wrong pretty badly.

Where a lot of people get confused is when they hear about "interest rates going up" (or down), meaning what the Fed does. What really matters is the interest rates on the bonds held by the ETF (or bond fund), which may or may not track closely to Fed rate increases (or decreases). Long bond yields have not responded the Fed increases by consistently going up: they've jumped around quite a bit, but aren't even close to where they were last time Fed rates were 3%. Long bond yields are lower now than a year ago, which was low by historical standards, even though Fed rates ahve gone up and up. Greenspan says he doesn't understand why and rejects as lacking evidence all the explanations offered by the finance explanation industry. Having predicted long bond rate increases, the finance explanation industry is now, more often, saying low yields may be here to stay. For me, that suggests we will finally see yields going up, but I wouldn't take my cynicism seriously enough to act on it (e.g., by shorting a long bond ETF).

What I will say, again, is that, even with the Penfed CD rates going down, you can still find 5-year CDs with yields higher than Intermediate bonds funds and ETFs, so the only reason to go for the fund is if you are convinced long and intermediate interest rates are going lower.
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