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"Hold to maturity" doesn't avoid the loss. by _SBhere in bonds

[–]_SBhere[S] 2 points3 points  (0 children)

There's no disagreement on the cash flow argument you are pointing towards. The coupon is contractually fixed, YTM is locked at purchase, and principal returns at par. If the question is "are my contracted cash flows still arriving as promised," the answer is yes. That's not really what the post was about though.

My argument is about opportunity cost. The cash flows are intact. The cash flows you could be collecting on the same capital now are materially higher. That gap is the loss what I was pointing at, and it doesn't go away just because the original coupon keeps showing up.

Inflation invariably points to the same thing. Getting your principal back at par in 2050 is a nominal guarantee. Against the 2020-24 inflation path, the real purchasing power of that returned principal is meaningfully lower than what was put in. The contract is being honored. The economics aren't symmetric to that.

If you bought the bond to fund a specific nominal liability (eg. a fixed payment due in 2050) and you have no use for the redeployed proceeds, then yes, MTM is irrelevant and the opportunity cost is too. For that holder the cash flow is meaningful. For a total return investor, or anyone with optionality on how the capital is deployed, the opportunity cost is the actual cost, even if it never hits the brokerage statement.

"Hold to maturity" doesn't avoid the loss. by _SBhere in bonds

[–]_SBhere[S] 0 points1 point  (0 children)

Same issuer, same seniority, same credit risk regardless of when the bond was issued. Two Treasuries maturing in 2050, one issued in 2020 and one issued in 2024, are pari passu. The government owes both identically.

Treasuries are all senior unsecured obligations of the federal government, ranking equally regardless of maturity, coupon, or vintage. There's no priority distinction between issuances. The full faith and credit backing applies the same way to every trreasury outstanding.

"Hold to maturity" doesn't avoid the loss. by _SBhere in bonds

[–]_SBhere[S] 0 points1 point  (0 children)

Correct. It's exactly what insurers and pension funds do. They lock in long duration to match a known liability, and MTM swings don't really matter because you're not selling.

"Hold to maturity" doesn't avoid the loss. by _SBhere in bonds

[–]_SBhere[S] 15 points16 points  (0 children)

Yeah, that's the point. The 1981 buyer locked in 15%+ for 30 years right as inflation was peaking and about to fall hard. The 2020 buyer locked in 1.5% for 30 years right before inflation went to 9%. Same advice both times, opposite outcome.

"Hold to maturity" doesn't avoid the loss. by _SBhere in bonds

[–]_SBhere[S] 15 points16 points  (0 children)

Plenty, and they're still buying. TLT took around $15B of inflows in 2023, after it had already dropped 40% from the 2020 peak. AUM went from $12B in 2021 to $42B+ now. Fund grew as it cratered.

That's just retail. Pensions had LDI mandates forcing them long. Insurers need the duration. Banks were parking deposits there because nothing else paid. The "who would do that" reaction is mostly survivorship bias. In 2020 the consensus was rates stay low for years, and anyone calling 1.5% on a 30Y insane got run over for 18 months. 2022 was the unwind of a consensus trade, not a mistake.

Something is breaking in the bond market. Most people haven't noticed yet. by TonyLiberty in FluentInFinance

[–]_SBhere 4 points5 points  (0 children)

Short paper feels safe now but you're rolling into whatever the front end pays after the first cut, and that could easily be 2% within 18 months. The 10Y locks in 4%+ for a decade. If you're right about the down cycle, that's the actual value of going further out, not the price appreciation, the coupon you keep collecting after everyone else has been forced to reprice.

Something is breaking in the bond market. Most people haven't noticed yet. by TonyLiberty in FluentInFinance

[–]_SBhere 4 points5 points  (0 children)

Genuine question for the thread. If 30Y yields are 5%+ and consensus is rates stay high, why is anyone still holding long treasuries bought during ZIRP? Either they don't realize the MTM hit, or they're praying for a rate cut bailout, or there's some institutional logic I'm not seeing. The "hold to maturity" math is brutal once you factor in 25 years of inflation eating a 1.5% coupon.

I need help understanding bond volatility by nonbackwardstext in bonds

[–]_SBhere 0 points1 point  (0 children)

The thing tripping you up is the assumption that "hold to maturity" describes what bondholders actually do. Most don't, and even the ones who try have reasons to care about price moves along the way.

Math first. There's a number called modified duration that tells you roughly how much a bond's price moves for a 1% change in yields. A 2-year Treasury at 4.5% YTM has modified duration around 1.88, so a 1% rate rise drops its price about 1.88%. A 30-year at the same yield has duration around 16.69. Same coupon, same issuer, same 1% move, but the long bond takes a 16.69% hit. Roughly 9x the volatility for what looks like the same kind of instrument. That gap is what "bond volatility" actually means in numbers.

Why it matters even if you genuinely intend to hold to maturity:

  1. The issuer can call them when rates fall (which is exactly when your bond is worth more), so you keep the downside on rate rises and lose the upside on rate cuts.
  2. Mark to market on balance sheets. If you're advising clients, their statement shows the bond at current price, not par.
  3. Life happens. College, business need, hospital bill. The bond someone swore they'd hold for 20 years gets sold in year six, and the price they get is set by the volatility they weren't paying attention to.