I suspect you are referring to the coupon. When people talk about market bond rates, which is what is mathematically linked to market bond prices, they are usually referring to the current yield:No, that doesn't sound right. I've never heard of a bond that didn't pay the same interest every year.Reading a little bit more about bonds I realize I'm missing important information about them. I thought the interest paid by a bond is constant each year, but apparently that's wrong and it typically gets lower each year as the bond effectively becomes a shorter and shorter term bond.
https://www.investopedia.com/terms/c/currentyield.asp
While it is true the coupon is fixed, the same type of bond with the same term will have the same market yield and the same market price regardless of coupon. What is happening is the discount/premium to face value will adjust for the coupon so as to result in the same current yield. Here are some examples from that article:
Assuming Brian is talking about current yields, what happens to them as bonds drop in term over time depends on the shape of the yield curve. But in a normal yield curve (which has in fact been the shape of the yield curve much more often than not), the current yield will be higher for bonds farther from maturity, lower for bonds closer to maturity.How Current Yield Is Calculated
If an investor buys a 6% coupon rate bond for a discount of $900, the investor earns an annual interest income of ($1,000 X 6%), or $60. The current yield is ($60) / ($900), or 6.67%. The $60 in annual interest is fixed, regardless of the price paid for the bond. On the other hand, if an investor purchases a bond at a premium of $1,100, the current yield is ($60) / ($1,100), or 5.45%. The investor paid more for the premium bond that pays the same dollar amount of interest, therefore the current yield is lower.
What this means is that as such a bond is heading toward maturity in such a yield curve, at current market prices the discount is going down/premium going up.
For rolling bond ladders, this is what produces what is sometimes known as a roll return--assuming a normal yield curve. You buy longer bonds at a bigger discount/lower premium, wait until they get short or mature when they have a lower discount/higher premium (of course at maturity, it converges on no discount/premium), take the proceeds and buy new longer bonds--you have generated an excess thanks to this expected appreciation. Again, though, this depends on the yield curve, and when the yield curve is inverted, roll returns will actually be negative.
Most common bond funds are structured as rolling bond ladders of some sort, so will get these roll returns/losses as a component of portfolio return. As always, if you hold individual bonds and then roll them the same way, you will also get these roll returns/losses as a component of portfolio return.
This is incorrect, most common bond funds do NOT directly control duration. Instead, most common bond funds have a term window.Bond funds do generally (always?) control the duration of the bonds they hold.Then in theory you want to sell the bond and re-buy a new bond at the original term so that you get back the longer term interest rate. And bond funds are taking care of this step for you.
A short-term bond fund might hold all bonds of a certain type with maturities between 0 and 5 years, say. When the short bonds it holds mature each month, so go from 1 month to maturity, they use the proceeds to help buy bonds that just went from 5 years and 1 month to 5 years. For the reasons explained above, with a normal yield curve, this can generate a roll return.
A market bond fund might hold all bonds of certain type with maturities of at least 1 year. When the short bonds it holds go from 1 year and 1 month to 1 year, it sells those bonds and uses the proceeds to help buy new bonds that were just issued, or otherwise just newly met their criteria (say due to a rating change for funds that use a rating filter), that month. Again, this can generate a roll return.
There are variations, of course. An intermediate fund may only hold bonds of a type between something like 3 and 10 years. It will be selling bonds which go from 3 years and 1 month to 3 years, and buying bonds that go from 10 years and 1 month to 10 years. And so on.
In none of these cases is the fund actually targeting duration. And duration actually depends on the outstanding mix of bonds available that fit its criteria, including whatever term widow it uses. For something like a 0-5 fund, this usually is not a large variable. But for something like a market fund, duration can vary a lot over time as the mix of outstanding bonds varies over time.
Understanding now what common bond funds are typically doing, people with rolling ladders are in fact doing something much like a bond fund would be doing. There is a bit of a complication in that outside of short bond funds, most common bond funds will sell before maturity, and in fact market funds in particularly usually sell at 1 year. There is typically not much difference between selling at 1 year and waiting until maturity, because prices usually don't change much for such bonds. But there can be some small differences sometimes.I've never heard of an individual doing the same thing by selling and rebuying, but I suppose it's possible. (I would think that an individual would instead have a rolling ladder, and allow the oldest bond to mature and be used to buy the newest bond. But I could easily be wrong.)
I note it is a not uncommon practice around here for someone to hold something like a MM, SGOV, TFLO/USTR, or something in combination with a market fund. If you put a rung's worth into such an instrument, it basically fills in that missing 0-1 period in a typical market fund.
Anyway, those are the basics of bond funds. And it is complicated enough that many people in these conversations seem not to really understand them very well.
Statistics: Posted by NiceUnparticularMan — Tue Aug 26, 2025 9:01 am — Replies 17 — Views 1547