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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.

dan
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