/biz/ - Business & Finance

>>56381352
I'm going all out.

When you buy a bond ETF you "lock in" the rate so to say, and even though you don't lock in like you would if you bought the bond itself, depending on the duration you do to an extent.

Let's say you bought $100 of a ten year bond fund yielding 5%. If the interest rate goes down by 1% then your bond fund will increase to $110 and that new fund will be yielding 4%. But you didn't buy your shares when it was $110, you bought it when it was $100. So for you, it would be $110 * 4% = $4.4 / $100 = 4.4%. This works with any number as well
>39$ at 5% -> rates drop by 1% so it increases by 10% -> $42.9 * 4% = $1.716 / $39 = 4.4% yield
The longer the duration and the higher the yield the more extreme this gets. This is bond convexity. If you buy a 20 year bond fund when rates are 5% and then it falls to 4% you get
>$100 at 5% -> rates drop by 1% so it increases by 20% -> $120 at 4% = $4.80 / 100 = 4.8%

It works with tips too. Right now the 20 year tips bond is at 2.51% and LTPZ has an average duration of 20 and is $51. If rates fall back to 1.5% then it'll raise to $61.2. And you'll barely be getting 1.8%. Kinda sucks right? That's what happens because rates are already low.

But here's the kicker, it works with inflation too. Let's say while rates are 1.5% that inflation is 2.5% (lol, we all know its going to be higher). It's going to pay out 2.5% for that current high $61.2. But if you bought it today at $51, then that comes out to 3% inflation payout. Inflation for tips bond etfs causes real returns if the NAV increases after you buy it.

The high for LTPZ was $92. If you bought it today and it got to that point, you'd be getting payouts of inflation times 1.8. Remember when inflation was 8%? You'd get 14.4%, that's 6.4% real returns above inflation, regardless of the actual fucking real return aspect of it.

This makes sense too, if you compare different TIPS ETFs the longer duration ones paid out way fucking mroe