Bonds yield less than cash right now. But they yield it for a longer time, whereas if/when central banks interest rates decrease, cash will start yielding less immediately.
Understanding yield-to-maturity and average duration of bond ETFs or funds is critical. Typically you find these numbers on the website of the ETF issuer. Sadly, justETF and Morningstar do not publish these numbers for bond ETFs.
The yield-to-maturity gives you the average yearly return you can expect over the average duration assuming market conditions remain as they are today (central bank interest rates and credit ratings).
So if an intermediate duration bond ETF has a yield-to-maturity of 4.5% and a duration of 7 years, you can expect an average yearly return of 4.5% over 7 years, if central bank interest rates and credit ratings remain the same.
If central bank interest rates decrease during this period, this average yearly return will increase.
If central bank interest rates increase during this period, this average yearly return will decrease.
You might think "ah ok, then when central banks start decreasing interest rates, then I will buy bonds". But that will be too late because the market will already have priced that in. Bond prices are not actually changing when central banks change interest rates, Bond prices are changing with the changing expectations of what investors think central banks will do in the future...
In the current conditions where central bank interest rates have been increased considerably recently, the yearly return will be below the expected average return in the beginning of the duration period, and above the expected average return at the end of the duration period.
Banker on Wheels has a cool bond ETF calculator that allows you to simulate such scenarios. And also a good series of articles about bonds and bond ETFs.
Here is a post with links to my favorite bond educational resources, including some insights about the current situation and explanations of why cash and bonds do not play the same role in a portfolio,
Understanding yield-to-maturity and average duration of bond ETFs or funds is critical. Typically you find these numbers on the website of the ETF issuer. Sadly, justETF and Morningstar do not publish these numbers for bond ETFs.
The yield-to-maturity gives you the average yearly return you can expect over the average duration assuming market conditions remain as they are today (central bank interest rates and credit ratings).
So if an intermediate duration bond ETF has a yield-to-maturity of 4.5% and a duration of 7 years, you can expect an average yearly return of 4.5% over 7 years, if central bank interest rates and credit ratings remain the same.
If central bank interest rates decrease during this period, this average yearly return will increase.
If central bank interest rates increase during this period, this average yearly return will decrease.
You might think "ah ok, then when central banks start decreasing interest rates, then I will buy bonds". But that will be too late because the market will already have priced that in. Bond prices are not actually changing when central banks change interest rates, Bond prices are changing with the changing expectations of what investors think central banks will do in the future...
In the current conditions where central bank interest rates have been increased considerably recently, the yearly return will be below the expected average return in the beginning of the duration period, and above the expected average return at the end of the duration period.
Banker on Wheels has a cool bond ETF calculator that allows you to simulate such scenarios. And also a good series of articles about bonds and bond ETFs.
Here is a post with links to my favorite bond educational resources, including some insights about the current situation and explanations of why cash and bonds do not play the same role in a portfolio,
Statistics: Posted by daviddem — Sat Apr 13, 2024 1:02 am — Replies 2 — Views 220