Why F?

[tsptalk]

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Hi CJ -
Here's a little Bonds 101.

You can track bonds with charts like you do stocks. They get overbought and oversold also. I don't know if I'd say there is a correlation between stocks going down and bonds going up. In theory (not always an exact science) when bond yields go down, bond prices (bond fund) go up, but also stocks tend to go up because the yield (or return) on the bonds becomes less attractive to an investor so they opt for stocks.

That's the theory. But when stocks were dropping and the economy was sinking in 2000-2002, Greenspan was dropping interest rates to stimulate the economy, thus bonds went up, even though stocks kept going down.

Now we have the opposite. The economy is heating up. Greenie must keep things from heating up too much (inflation?) so he will raiserates. Stocks will keep going up because the economy is good as arecorporate earnings, but bond prices (bond fund) should weaken as we haveseen the past few weeks.

The reason I am playing bonds now is because they have come down pretty hard, pretty quickly. I'm just looking for a short term bounce.

Hope that makes some sense.
Tom

 

[CJ]

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Thanks Tom, the fog is clearer.

Another question, -> I thought I read somewhere"When the US dollar goes down the bond funds go up" (F-Fund)

Well, Yesterday the US dollar was down 1.1% against the Euro, 1.2% against the Swiss buck, and over 1.0% against another countries dollar. If the above is true, Why was the F fund down the past two days?

CJ

 

[tsptalk]

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I don't know of that one, but it would make sense in general as the dollar goes down when our economy is slowing and that triggersthe Fed to lower interest rates which raises bond prices.

I doubt it correlates day to day however. The dollar could be down because the euro is up and thatshouldn'taffect bonds.

Tom

 

[Pete1]

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The rising/falling dollaris more of an I fund issue. F fund is more related to rising/falling interest rates. Just keepan eye on rates and you should be okay. I still feel that the better risk/reward relationship for both the short and long term isto be found in the stock funds. Once youtake a significant loss in the bond fund,you might have to wait a very long time to get your money back. At least with stocks, if you get hammered,you can make it up quickly. How many .10 cent increases have we seen out of F fund?Few andfar between.

 

[Rolo]

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eukrate wrote:

3. ... I'm arguing that in this declining rate environment, take advantage of F then get out

I think the declining rate environment is sufficiently over; certainly they are not dropping any further. G Fund is as fixed as fixed income can get.

Going on the safe assumption that the F Fund is at or near its nadir, would now be a good buy point for "fire-and-forget" long-term investors? I do not know enough to answer that.What annualised rate of return would one see X years from now in the F fund?

 

[Pete1]

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I would be surprised if the F fund is at the nadir - we have not even had a rate increase yet. Many in the financial press are talking about a series of2-4 interest rate increases through 2005. The 30 year fixed mortgage rate is supposed to be around 7% by the beginning of 2006. We have a nice fixed income alternative in the G fund. Why take additional risk with your "safe" money?

 

[Pete1]

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I do want to add that if you are a reallyastute timer, there may be a wonderful opportunity once the interest rate hikes level off. 1994 seems somewhat comparable to what we are seeing now in 2004. Bonds returned around 18% after the interest rate hikes leveled off 1994 and stocks also went wild when the rate hikes were completed.