Thank you. The complexity of this time sequence is hard to absorb at first. And yet the mathematics of bonds produces a completely definitive translation of variable interest rates into a definite response in time with both instant and delayed elements.Perhaps the most important misunderstanding, and IMHO it's a much bigger deal than convexity, is that price drop = duration times interest rate rise applies to an instantaneous rise in interest rates. If the interest rate rise is spread out over a few years there is much less depression in price.
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I would add the comment that one is really not out of the woods because what really happens is that unpredictable, statistically characterized, changes in the interest rate spectrum over time just get translated into an equally unpredictable, statistically characterized, change in the bond holding with time.
You could say the that the real issue is the degree to which you are happy with variability and uncertainty in investing compared to demanding predictability and certainty. The less you demand of the latter the easier it is to live with investments and the less you seek refuge in investment gimmicks and devices. This does not mean there are no applications where certainty is appropriate. In that case there are investment media that suit the requirement. Bond funds usually are not in that list.
Statistics: Posted by dbr — Sun Jun 23, 2024 9:45 am