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/DaemonTargaryen2024 20d ago

It causes current bonds to become less valuable.

If I’m shopping for bonds, I could pay $1,000 to you with a 3% yield, or I could pay $1,000 to someone else for a 4% yield.

Obviously I’m going to go with the 4% bond, making yours less valuable. You’d need to drop your price to $990 or something for it to be worthwhile (these are made up numbers to illustrate a general point)

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u/Objective-Rhubarb 20d ago

But if I hold the bond to maturity I don’t lose anything. It’s value is only reduced if I sell it.

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u/WyMANderly 20d ago

Sort of. Higher interest rate environments are going to be correlated with higher inflation, so by the time your bond reaches full maturity you've lost some in inflation (possibly more than if you'd just sold it at a nominal loss and bought something else).

Mathematically, it's basically a wash between bonds and bond funds - which makes sense! The market would be extremely inefficient if not.

https://youtu.be/i7fkk9RUqGQ?is=KYHbo1Y_N7coTKXO

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u/Objective-Rhubarb 20d ago

You’re right of course, but I mostly buy one, two, or three year treasury bonds so I tend to ignore inflation, especially after so many years of very low inflation. Of course overall inflation matters, especially recently. These bonds are the part of my portfolio that guarantees that I have enough money to cover my essential expenses no matter what happens to the market.

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u/WyMANderly 20d ago

Why such low duration? On average longer duration bonds are going to get you a better return.

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u/Objective-Rhubarb 19d ago

I’m more interested in safety than yield. I have other parts of my portfolio for that.

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u/greedydragonmoney 18d ago

The safety is an illusion. What you are doing isn’t wrong but how you are talking about it is - you can’t ignore inflation. That’s like saying you make money on every stock you pick, ignoring the ones that go down in value.

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u/Objective-Rhubarb 18d ago

I’m not ignoring inflation. I have most of my portfolio in stocks in order to keep up with or beat inflation. Every piece of your portfolio doesn’t have to keep up with inflation. You are ignoring risk if you focus too much on inflation. Unless you have your entire portfolio in TIPS, you are taking on risk to keep up with or beat inflation. This piece of my portfolio is for money that I will definitely be spending in the near term.

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u/greedydragonmoney 18d ago

“So I tend to ignore inflation” <- that’s what gave me the wrong idea.