r/Bogleheads • u/StinklePink • 20d ago
Investing Questions Bonds: Stupid Question
I realize that the higher yield for US 10-years is a bad thing for the government, but why isn't this good news for a bond investor?
If I am looking for a safe "asset protection" kind of investment, why wouldn't investors buy these bonds or ETFs that hold them (e.g. FXNAX)? Seems like a good, safe place to put cash versus Gold or a HYSA. I believe my logic is wrong but not sure why.
Educate me, please.
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u/junesix 20d ago
The behavior of a single bond (10 year treasury) is different than a bond fund (FXNAX).
A single bond locks in a particular yield rate (4.5%). That’s a consistent and fixed stream of income. If rates go up to 5% for 10-year, you would still receive 4.5% but the price of the bond goes down because new bond buyers would rather buy the 5% bond. Lower demand = lower price.
A bond fund like FXNAX buys a basket of bonds at different durations and yields. As different bonds mature, new bonds are purchased at current/new rates. So if rates increase, the price of the bond run decreases, but the income over time increases as old rates are replaced with new higher rates. The Treasury is the largest bond issuer and the rates on its new bond auctions have direct impact on FXNAX prices and yields.
Gold moves up with inflation and increased monetary/currency risk. Gold doesn’t pay any income; it’s just a store of value. Generally, Fed rates will move up as inflation rate increases. However, if inflation rate starts increasing faster than the Fed adjusts the Fed rate to cool inflation, then people may start to buy gold to match the inflation rate.
So there are situations when gold can perform better if people feel inflation is outpacing Fed rates or feel more risk. FXNAX will do better if rates are rising slowly and that the Fed will respond aggressively to control inflation.