High return on corporate bond index last year implies yields and spreads come down, so bonds are less attractive now.
How does this stand? What is the relationship between bond index return and yield/spread??
Also, can you please explain to me why the volatility of real interest rate is higher than that of normal?
Thank you,
Don’t understand the context of that sentence.
Can you indicate the page and book, also what author: CFAI, Wiley, Kaplan
Which is more attractive: a bond with a 5% yield, or an identical bond with a 20% yield?
The relationship is pretty complicated: when yields/spreads go down bond prices (and bond index prices) go up. And vice-versa.
I am sorry if i was being vague. The material is from Managing Investment Portfolios Ch5. Asset allocation. Or maybe Ch7. Fixed Income portfolio.
The way I see it is that since yields/spread went down, the price of the bonds went up, hence high returns for bond holders. However, for new bond investors, bonds are now pricey and have low yields so they are no longer an attractive investment (relative to higher return investment options)
bazz got the right answer, in my opinion.
"High return on corporate bond index last year implies yields and spreads come down, so bonds are less attractive now."
This statement is tricky to understand alone without further context (that probably the book provides).
Indeed, if a market bond portfolio outperformed in a previous period (due capital gains) because rates went down (so spreads), then it is less attractive now to buy bonds because they are more expensive.
For a bond index to appreciate to the level it is not much attractive to buy bonds now, it is probably because the volatility of real interest rate is higher. This volatility of REAL rates makes the bonds prices to change in a structural basis. Changes in the real rates generates changes in nominal rates.
If you hold a bond until maturity, then this effect does not affect you. However, the majority of investors does not hold bonds until maturity. In other words, they speculate over interest rates curves and the volatility of those rates.
Dang! now i see. Thank you so much for your insights, I appreciate!
That is how it goes… Thank you, Now its clear for me!