When holding bond funds, when does the duration actually matter? You are holding a long-term bond fund and the following happens:
- Interest rates start to fall
- Bond prices for bonds in the fund increase
- Manager sells bonds whose maturities become too short as defined in the prospectus
- The bonds sold in step 3 are sold at a capital gain
- New long-term bonds are added to the fund with lower yields
In this example, should the fund's price rise in proportion to the fund's duration?
If the bond fund's price really changes in proportion with duration, why? New bonds at lower interest rates are being added while older ones are being sold at a premium, so over the long-term I wouldn't expect interest rates to have any effect on the overall value of the fund.
Maybe the only time bond-fund duration matters is when you have a time constraint on your investments? E.g. if you're set to retire in 3 years, is it a good idea to reduce your bond-fund duration to around 3 years?
Submitted November 24, 2022 at 09:03AM by ochncap1 https://ift.tt/hynX0SM
