- What is the connection between prevailing interest rates and a bond's maturity?
- What happens when bond yields for short-term maturities are higher than their long- or intermediate-term counterparts?
- What is the connection between bond prices generally and the health of the economic system in which I may invest?
- What is "laddering"?
- Why do advisers like to use laddering techniques?
- How much money flowed out of U.S.-listed bond mutual funds and bond exchange-traded funds in 2013?
What is the connection between prevailing interest rates and a bond's maturity?
Changes in prevailing interest rates may change a bond's returns, but not in the same way for all bonds. If a bond is relatively long term regarding the date when it matures, its price may be more affected when compared with a bond with a relatively shorter maturity. Generally, bonds of longer duration and maturities will offer yields that help to compensate investors for this extra interest-rate risk.
What happens when bond yields for short-term maturities are higher than their long- or intermediate-term counterparts?
When yields in a yield curve move in the opposite direction than expected, it is likely that investors see a recession looming, and that interest rates may decline in the future.
What is the connection between bond prices generally and the health of the economic system in which I may invest?
It is important to understand that the price of debt or bonds is related to the general economic cycle of an economy, and the perceptions by the market at large of the prevalence of inflation or a period of falling prices (deflation). It is generally thought that in order to fuel an economy, we must make just the right amount of credit available, and price loans and bond instruments at the appropriate level. If we make credit too cheap, or price our money and debt instruments too cheaply, it may exacerbate inflationary tendencies in an economy. Conversely, if we make the price and availability of our credit too expensive, it may also have a deleterious effect, and cause an economy to slow down. So the pricing of our debt and the availability of credit has great bearing on, and influence upon, economies.
What is "laddering"?
Laddering is a strategy of staging the maturity dates of bonds in order to maintain your portfolio's fluidity, so that you may not have to purchase many bonds when interest rates are low and favorable. As each bond reaches maturity, you can reinvest the principal into a new bond, with a new maturity date. Many people use laddered investments as sources of income, as each bond may generate income to the investor at different times. When the bond comes due, many investors move the money into more liquid, easily accessible investments.
Why do advisers like to use laddering techniques?
Investment advisers like to employ laddering techniques because they allow clients to preserve their portfolios without having to liquidate positions in other investments, such as equities or other longer-term investments such as mutual funds, since they may still produce income.
How much money flowed out of U.S.-listed bond mutual funds and bond exchange-traded funds in 2013?
According to experts at TrimTabs Investment Research, as reported in Bloomberg, investors in U.S.-listed bond mutual funds and exchange-traded funds (ETFs) withdrew a record $86 billion in 2013, topping the previous record outflow of $62 billion set in 1994.