[jldugger]

> UST prices fall as interest rates rise

Just to underscore the point here, in the past year, the fed has raised rates a ton, and counterintuitively, AGG, an ETF tracking a bond index fund heavily weighted towards US gov debt (by necessity) is down 15 percent over the past 2 years[1].

You might naively assume a bond fund values would reflect interest rates but there is a lag as you wait to roll over old bonds into new debt at the new high interest rate, and until that happens you don't collect any of the extra interest. Even if you sold the old bonds to buy new good ones, nobody will buy them without a discount to make up for the low interest rate.

This is why you have the weird mark to market rules. A US bond _will_ mature at 100 dollars, but can rationally sell on the market below 100 dollars.

[1]: https://yhoo.it/3Js4bl6

[hn_throwaway_99]

> counterintuitively, AGG, an ETF tracking a bond index fund heavily weighted towards US gov debt (by necessity) is down 15 percent over the past 2 years.

Is that counterintuitive? "Existing bond prices fall when interest rates rise" is pretty common knowledge I thought, and it seems quite intuitive to me. If I have a bond that matures in 2 years that only pays 5%, and I can buy a new bond, with the exact same characteristics, but which pays 10%, then if I sold my bond now I'd have to do it at a discount in order to give it an effective 10% yield.

[jldugger]

For financiers no, for random engineers on HN, maybe.

Anyways, I intended my main point to be that bonds are down 15 percent, but maybe obscured that in my haste to press send before bouncing for a meeting.

[CPLX]

There's absolutely nothing counterintuitive about that at all. It's one of the most core principals of finance that as interest rates go up bonds go down.

In fact it's so direct that they are quite literally the same thing. The difference between the face value of the bond and the actual amount you have to pay to buy the bond is how you define what the interest rate is.*

* Yes I know subject to time to maturity and coupon and all that.

[beezle]

There are also negative tax problems for those who continue to hold the ETF or mutual fund after others have sold and the redemptions cause the sale of actual bond holdings most likely at a loss.

Personally I always advise friends/family who are considering bond funds to instead consider using Treasury Direct to create their own bond portfolio if their intent is to hold to maturity. Similar can be done with liquid corporate bonds through brokers like IB.