I still want to see the math. Yes, a bond will lose market value when interest rates are rising. But that bond also creeps towards maturity year over year, causing its price to converge towards its face value regardless of rate environment; and new units purchased at that point go in at the higher yield. In a bond fund, the higher-duration bonds will tick down over those years and converge towards their own face values.
There's a huge difference between bond prices that drop because of interest rates, and share prices of AIG/Citigroup/GE that drop due to investor confidence. Shares of those companies have no underlying redemption value. Bonds do, regardless of the market prices they encounter along the way, and duration is what measures how far their market prices will deviate. If I hold a 20-year government bond and the market value drops 20% due to a rise in interest rates, it doesn't mean there's a risk the bond will go bankrupt. I will still collect all the payment and recoup the face value if I hold it to maturity.
There are two effects that must be considered:the market value at any point in time will still be below that of GICs.
[If the durations are similar, the returns will be similar./quote]1. The absence of 'mark-to-market' on GICs. This effect is an illusion.
queerasmoi wrote:If the math is so simple, let's pull those historical numbers and see them. I don't know where to get those numbers myself.
queerasmoi wrote:Interesting chart, thanks. But yeah I'd like to see numbers that are reflective of actual portfolios.
The behaviour of the one bond index shown there is particularly extreme seeing as it's a long bond index. But even then, you see that every spike in interest rates produces a drop or stagnation in the bond portfolio for 1-3 years and then it starts to swing back up due to the higher yields.
Shakespeare wrote:I believe Bruce did a study on GIC returns some years ago and found they 'won' over a certain period.
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