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Isn't this a good thing? The Teasury bond will pay out more with a higher interest rate, meaning a larger yeild. In addition, as markets decline, the bond fund price increaes, which is also good for the holder.

Let's try this again. Yes, it's true that if long bond rates go up, then long bond yield increases. BUT, that only applies to those bonds bought at the higher rate (lower price). The yield on existing bonds will not change, BUT their value will decrease to that of newer bonds. Fortunately, you have the option of just hanging onto your bond and waiting till it matures; in which case, your effective price never changed, nor did your yield.

OTOH, in the case of a bond fund, when rates go up, prices go down. However, as has been explained by both Loki and Wendy, you do not own the underlying bonds in the fund. So, you cannot wait for them to mature to get back your purchase price. Instead, you have to wait until/if the price goes back up. And it's no use consoling yourself that the yield has gone up. It may have gone up for new buyers at the higher rate, but your effective yield will continue to be what it was when you purchased; unless the distribution increases, which isn't too likely unless you hang on for a long time.

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