Is there anybody can tell me how we can make money on bond when the interst increases?
I am stick to the idea that when interest increases, the bond price will go down. If the bond price goes down, we buy it today to expect the bond goes down further when interest goes up right?
Is there any expert can help me?
Thanks
Look up convexity.
Bonds are priced at the current value of its future cash flows.
If you expect interest rates to go up, you generally short a bond, or short a bond future.
Or just issue debt (which is mathematically identical to same as shorting a bond on yourself, though it comes with more legal obligations.)
If you’re buying bonds when you expect interest rates to rise, either it’s because you are forced to be fully invested, because you think some bonds will be affected more than others (so you sell some that are more sensitive and buy others that are less), or because you are trying to reduce other forms of risk (like risk from stocks).
If you have to be invested and you expect interest rates to go up, and you have to be buying, then the next best thing is to reduce your duration. Or you can ladder a bond portfolio, so that part of your bond portfolio is always maturing and being able to be invested at whatever the new rate is (which you expect to rise).
An inverse bond ETF could theoretically do the job for a non-institutional person – but be careful, bond markets are up 3.41% YTD (Barclays U.S. Aggregate Index) as of this writing.
What’s that, you say, bonds have more than given back their 2013 losses despite a doubling of interest rates within that period, and continued anxiety coming from retail bond investors? That is exactly what I said.
Do some research about core bond _ total _ returns (not just price returns) during periods of rising rates through history. Post back here when you find out.
DoW makes an interesting point about total return. One thing that’s interesting is that as the interest rate goes up, the duration goes down, so bonds at a high YTM or high coupon are less sensitive to interest rate increases. At the same time, they have a high current yield, so you get less sensitivity and more income. Of course, we are still a long ways away from that 10% interest rate environment of the late 70s early 80s. Also since that was inflation driven, the real returns might not be nearly as impressive.
Yea, you make a return by not selling it for less than the interest you recieved lmao. Or you take an off-setting position in a hedge or something else. Or pick a amortizing product so you have cahs flow to ride up the curve.