Understanding Long Duration Bonds

Long duration bonds are a type of investment that can be a bit tricky to understand, but don't worry, we'll break it down for you.

Long duration bonds are typically issued by governments or large corporations with a high credit rating, which means they have a low risk of defaulting on their payments.

These bonds have a very long time to maturity, often 10 to 30 years or more, which means you'll be earning interest over a long period.

This can be beneficial if you're looking for a steady, long-term income stream, but it also means you'll be locked into the investment for a long time.

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Bond investing is a type of investment where you lend money to a borrower, typically a corporation or government entity, in exchange for regular interest payments and the eventual return of your principal investment.

The borrower, known as the issuer, uses the money you lend to fund their operations or projects. In return, you receive a fixed income stream, which can be a attractive option for investors seeking predictable returns.

Long-term bonds, which we'll be discussing in this article, are issued with maturities of 10 years or more, and their prices are affected by changes in interest rates.

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Long-term bonds are typically issued with maturities of 10 to 30 years.

They offer a low-risk investment option for investors seeking predictable returns.

The return on investment for long-term bonds is usually lower than that of shorter-term bonds, but the risk is also lower.

The coupon rate, or interest rate, is set at issuance and remains fixed throughout the bond's life.

Bonds with higher coupon rates are often more attractive to investors, but they also come with a higher yield, which can increase the risk of default.

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I Bonds are a type of savings bond that earns interest monthly and compounds interest semiannually. This means your bond's value grows over time due to both interest earned and principal value increase.

You can buy I Bonds in electronic form through your TreasuryDirect account, with a minimum purchase amount of $25 or any amount above that to the penny. For example, you could buy an I Bond for $36.73.

I Bonds earn interest for 30 years, unless you cash it before then. You can cash in your I Bond after 12 months, but if you cash it in less than 5 years, you'll lose the last 3 months of interest.

Here are some key facts to keep in mind:

I Bonds can be a great way to save for the future, and they're also a popular gift option. If you're considering giving I Bonds as gifts, keep in mind that in a calendar year, one Social Security Number or one Employer Identification Number may buy a certain amount of I Bonds, with limits applying to individual accounts based on the Social Security Number of the first-named in the registration.

EE Bonds are a type of savings bond issued by the US Department of the Treasury, designed to help families save for their children's education expenses.

They are specifically designed to encourage saving for education expenses, and can be redeemed tax-free for qualified education expenses.

EE Bonds can be purchased online or through a financial institution, and can be registered in the name of the child or in the name of the adult purchasing the bond.

The interest earned on EE Bonds is compounded semiannually and is tax-free if the bond is used for qualified education expenses.

EE Bonds have a minimum purchase amount of $25 and a maximum purchase amount of $5,000 for a single bond.

The interest rate on EE Bonds is determined by the US Treasury and is typically higher than other types of savings bonds.

EE Bonds have a 30-year maturity period, after which they must be redeemed or rolled over into a new bond.

Redemption of EE Bonds can be done by cashing them in at a bank or by using the Treasury Department's online redemption service.

EE Bonds can be rolled over into a new bond every 12 months, allowing investors to continue earning interest without having to cash in their bond.

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The Price Yield Calculator is a useful tool for investors, providing an indication of an ETF's yield and duration for a given market price.

The calculator estimates the ACF Yield, which is the discount rate that equates the ETF's aggregate cash flows to a given ETF price. This yield is based on the yield to worst methodology, which assumes a bond's cash flows occur at the call date or maturity, whichever results in the lowest yield.

For example, as of January 3, 2025, the ACF Yield for a specific ETF was 4.91%. This is a significant indicator of the ETF's potential return.

The calculator also provides the Modified Duration, which measures the sensitivity of the ETF's price to changes in interest rates. In this case, the Modified Duration was 16.11 years.

It's essential to note that the ACF Yield will differ from the ETF's Weighted Avg YTM. This is because the ACF Yield is based on the aggregate cash flows of the ETF's holdings, while the Weighted Avg YTM is based on the individual bond holdings.

Here's a summary of the key metrics provided by the Price Yield Calculator:

Bonds are often referred to as "fixed income" because they deliver income via cash flows from coupon payments on a set schedule.

These payments typically occur on a set schedule, which is one of the reasons bonds are attractive to investors looking for a regular income stream.

The biggest risk for bond investors comes from changes in interest rates, which can affect the value of their bonds.

Managing duration risk is crucial for investors, especially in an environment where interest rates are changing frequently.

In an inverted yield curve, longer-term interest rates are lower than short-term interest rates, a situation that has been observed for most of 2024.

This is unusual because longer-term yields are typically higher than those of bonds with shorter maturities, which compensates investors for the risk of holding bonds for a longer period.

The 2022-2024 yield curve inversion lasted 27 months, ending in September 2024, which is longer than previous inversions in 2000 and 2006.

The market expects short-term rates to decline in the future, which has led to the long-lasting inversion of the yield curve.

The yield curve is expected to revert to its normal shape, with short-term rates being lower than longer-term rates, also known as a normalization of term structure.

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Bonds have the potential to deliver income via cash flows from coupon payments, which typically occur on a set schedule.

One of the biggest risks for bond investors comes from changes in interest rates. Managing duration risk is crucial, especially in today's environment.

Bonds are often referred to as “fixed income” because of their predictable cash flows. This predictability can make bonds an attractive investment option for those seeking stability.

However, a significant shift in interest rates can impact the value of a bond, making it essential to consider the current yield opportunity in bond markets.

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Managing bond risks is crucial, especially with long duration bonds. One of the biggest risks for bond investors comes from changes in interest rates.

Bonds have the potential to deliver income via cash flows from coupon payments, but managing duration risk is essential. The Federal Reserve increased short-term interest rates from 0.25% to a range of 5.25-5.50% between March 2022 and July 2023, causing the broad U.S. bond market to decrease by 8.8% during that period.

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The Bloomberg US Aggregate Bond Index has a duration of about 6 years, which can be used as a benchmark for determining how much interest rate risk to hold. However, this may not be suitable for all investors, as equity heavy portfolios may want to hold more interest rate risk to add diversification.

Investors can adjust their bond portfolios to take into account potential longer-term trends in interest rates. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Interest rates do not always move in parallel, so different interest rate environments could call for adjustments to holdings. The Federal Open Market Committee reduced the Fed funds target rate by 0.50% to 4.75-5.00% at the September 18th meeting, signaling a cautious approach to reducing interest rates.

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