Bond Prices

Jul 26, 2022 | Finconomics 101

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Summary: Fed rate changes impact more than the stock market, but also the bond market in a big way. The longer dated the bond, the more “convexity” or price change in relation to an interest rate change as evident in this chart. Owners of a 30-year Treasury with a 3% coupon can expect larger price swings relative to owners of 10-year treasuries. If the 30-year 3% coupon owner buys the bond when prevailing interest rates are 3%, they pay par (or $100 per bond). If interest rates drop to 1%, these investors will make a 52% profit! Conversely, if interest rates hike to 6%, they lose -42%! Some investors expect more Fed hikes and these will avoid buying bonds for this reason. Conversely, those investors who expect the Fed to lower rates to fight inflation are long bonds (with the most confident buying 30-year treasuries). For an investment that is supposed to be so safe, bonds can represent a volatile trading instrument when the Fed gets busy.

Bond Interest Rates Graph

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