Hello all, I am trying to educate myself. I understand the effect of rate cuts and increases on stocks, but how do rate cuts affect bonds? I am looking at my 401k which only has 5 choices and 1 is a bond fund. I have the option of investing in a fund is invested in the Barclays U.S. Debt Index Fund, bond index fund which holds a representative sample of the bonds in the Lehman Brothers U.S. Aggregate (LBA) index. What I have been told is that when rates go down this value goes up. It has the last month. Is there a flaw here? Thank you in advance
yes. that is how it usually works. rates down, bond prices up. however, when the fed cuts rates it's done at the short end of the curve. there are other factors that come into play when you are talking about rate cut effects on bonds (usually refers to the 30 year), such as inflation outlook, economic outlook, etc. etc. It's not as cut and dry the longer you go out in the curve.
http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve http://www.investopedia.com/terms/y/yieldcurve.asp http://www.yieldcurve.com/marketyieldcurve.asp http://finance.yahoo.com/bonds