Correct me if I'm wrong, but right now with interest rates near 0, with bond funds it's all about risk on/risk off. Investors have been skeptical of the stock market rally (risk off) so bond funds keep rising. But, if the rally continues, everyone becomes a believer and goes risk-on, bond funds would crash. But how bad - I think they could very quickly lose 20-30% or more?
That's why it's a very dangerous game that the Fed is playing. As others have alluded to, it's not a real market and hasn't been for the last 3-4 years. Yes, they could lose 20-30% in an instant. Of course, that's also been the mindset that has in part fueled SOME of the rally combined with all of the Fed machinations.
the big diff b/w bond funds and buying individual bonds is that bond funds never "mature" - they're always buying and selling bonds in the port so you don't "have" to get your principal back like you do w/ an individual bond unless they default. yields on ig (investment grade) suck right now but it is what it is - in the next 3-5 years IMHO, the best thing that happens is you get your yield and no capital loss. worst case you get your yield of a few % and suffer a double digit cap loss.
I think we have a multidecade top in bonds right now. Just like in 80's a multidecade bottom. SO I think long bonds is a bad bet.
doubt either of those funds will move much in the next few years, as rates go up, the nav drops, but the yield also goes up. In the last ten years, rates have been steadily declining which accounts for the positive historical performance. Doubt you will see anything like that in the future. Nothing wrong with the funds, but not sure why you just bought at what most believe is the top. Wouldn't worry about it too much, It's going to be hard to move rates higher. More likely they will decline, but it's hard to go below zero. But it seems to me at this point, you have no upside potential and more risk than return.
there is no way in hell i'd be caught dead with a bond fund like the one's you listed anytime soon. if you "must" invest in bonds figure out what your actual time frame is and just buy bonds of that duration and eat the low % yield. so if your time frame is 3-5 years buy bonds of 3-5 years and wait til you get your capital back. if you buy 30 year debt funds and then cash out in 5 years it is not all that unlikely that you could see a tremendous capital loss. just look at what the value of an investment like that in general european 30 year debt would have offered over the last 5 years with their debt crisis going on now- you would have lost significantly more than you gained in interest over the period. now if you think there is no way that the US could suffer the same kind of crisis-> get your head out of the fucking sand. it is inevitable that we will suffer the same crisis and i foresee a 70% drawdown (if not more) in the value of the 30 year bonds at some point in my life (i'm only 30 now). i will never invest in debt longer than 5 years and for now i don't even see the point in taking on the risk of the financial system for the .5% you'd get in shorter dated debts. the only assets i would be willing to park my money in right now are commodities, but if that is too much risk for you i'd just sit on cash until there is a better opportunity available. with earnings underwhelming i don't see stocks as a good investment at these lofty valuations, and debt is a ticking time bomb (i have traded us debt futures as my only source of income for the past 7 years) that i'll only be watching for short signals.
What if there is a deflation? (interest rate + deflation rate) can become a big number, even if IR is low?)
Normally there is an inverse relationship between TLT and SPY, but since October 2011 they have both gone up (until the last couple weeks). Euro fears and Operation Twist created the correlation and it seems Euro fears are subsiding. Will TLT go up if SPY goes down ? It should, but will it ? Euro indexes are still close to 2009 lows ... will they rebound and the SPY tank as Euro money flows back into Europe ? Look at the recent up in EWI/EWP charts and is that the money flowing out of TLT ? Heck compare EWG to SPY - and Germany has the strongest economy around ... SPY is going up on vapor IMO ... one week ? two weeks ? one month ? two months? ... not sure when but the bough has to break sooner or later - we could have a 10% correction and only get down to Jun 2012 lows.
one of my funds is the Vanguard Long-Term Treasury Fund so as the long term interest rate goes up i'm pretty much losing money with that fund, correct?