Bond prices: 'Six of one...'

Bond prices: 'Six of one...'

Few investors - unfortunately - possess any ability to time movements in markets - this is the case for both equity and fixed income markets. Therefore as an investor in fixed income we suffer price falls after rises in market yields. The infographic below demonstrates that there is no free lunch when it comes to moving money between different (similar) bonds in order to benefit from higher coupon payments.

Market yields dictate a capital value movement in the bond price to ensure there is no risk free arbitrage opportunity available. The infographic presents two options after an instantaneous yield rise: hold the bond, or sell it and buy a newly issued bond paying a coupon rate equivalent to the new market yield. The outcome is the same regardless of the choice made.

The elegance of bond maths.

Beyond year 1, the investor in the example above is better off going forward and is benefitting from higher yields, and the result is the same regardless of the option chosen. As investors with liabilities extending beyond the duration of your bonds, yield rises are a good thing. It means that any proceeds from sales or coupon income are reinvested at a higher rate. As investors in fixed maturity funds one can benefit from keeping duration higher which, over time, can benefit from roll down return during periods of typically upward sloping yield curves.