Skip to main content
No. of Recommendations: 0
Bonds work differently. NAV *only* rises due to decreases in the market interest rate; the *only* fall due to increases in the market interest rate.

In one sense, that's tautological, if you're investing in a bond fund that owns bonds that themselves make up the "market interest rate."

One could say you could make money in corporates, however, even if the "market" rate changes, as long as the risk spread falls and the rates on those corporates go down relative to Treasuries (which is what I'd usually call the "market rate").

Same thing with munis. You could argue that muni rates are artificially high compared to "market" rates on Treasuries. Yes, the price rise comes from muni rates falling. But that wouldn't necessarily translate to rate decreases through the bond market.

This is how actively traded bond funds supposedly make their living. And while I'm skeptical about how you earn enough extra return to pay for your added expenses, I'm positive that market inefficiencies in the bond market exist, at least from time to time.

Just look at the performance of closed-end funds like GIM and TEI (which admittedly are global and have the foreign currency element to them). Up and down 5-10% in the matter of days? You can make (or lose) money no matter what rates do.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.