It's disconcerting that owners of bond funds don't understand that they
can go down in value.

Good explanations previous, just a general thought/ comment about what
investors do and don't understand.

Nosmo_King58_[at]_yahoo.com (Nosmo King) writes:

- quote -

You do if you have to mark its value to market. Which is *exactly*
why bonds which have gone down in value lower the NAV of a fund -
the individual bonds within that portfolio have gone down in
market value and one has "lost money".

Just like a stock which goes down, you don't *recognize* the
loss (ie. for tax purposes) perhaps, but you've assuredly
lost money (ie. your net worth has decreased).

--
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Rich Carreiro <rlcarr[at]animato.arlington.ma.us> writes:

- quote -

And, of course, downgrades from investment-grade to junk...


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Are you posting responses that are easy for others to follow?
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Mark Freeland wrote:

- quote -

snip
- quote -


Uh, right you are. I wasn't suggesting that they are not marking to
market each night. But you are right that I assumed (or rather missed)
the issue regarding overnight paper blowing up the average turnover
numbers.

My original reply (the bond value lesson) did assume marking to market,
as it discussed PV of bonds fluctuating based on changes in rates.
Still, OP didn't care for that answer anyway. But you've just taught me
not to make certain assumptions, thank you.
JOE

a high quality bond fund is always adjusting its rates because in a
rising interest market its always buying and selling bonds .when you
buy an individual bond unless you bought it when it first came out the
bond you buy sells for more or less than what you will get at
maturity...if it pays off at 1,000 at maturity in a rate dropping
enviornment you may pay 1200 for a bond that pays you 1,000 at the end
...the difference is made up in interest.while a current new bond like
yours may be 1,000 with a 5% intrest rate your older bond is say paying
7%.... so while it looks like even with an individual bond you are
loosing principal the fact is your collecting a higher intrest rate to
offset that..........same with a bond fund.as the principal drops in a
rising rate market your interest rate isnt fixed like an individual
bond ,its rising as the bonds that are sold or matured are
replaced.....if you remain in the bond fund for the "duration " rating
of the fund you will always pretty much come out very close to the
origional rate you put your money in at.....

if the day you bought into a bond fund rates were 5% and you paid 10.00
a share,if the duration of the fund is 5...than if rates rise to 6%
your principal will drop 5% to 9.50 but now you are getting 6%not 5%
interest....at the end of around 5 years if the duration of the fund
hasnt changed all that much then you would have collected an additional
1% interest for 5 years adjusting for the 5% drop in principal with 5%
more interest instead.the key is to stay in the bond fund long
enough.....its no different than selling a bond before maturity if you
bail to soon from a bond fund

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:PJqdnVpU8-HEVcbZRVn-tQ[at]comcast.com...
- quote -

You are saying that when computing the NAV (which is the sum of the values
of the underlying assets divided by the number of shares outstanding), the
fund may use a future price as the value of an underlying asset. This, in
contrast with marking to market.

As the poster above you said, the fund is required to use current (not
future) prices. As it is written (Investment Company Act of 1940, Section
2(a)(41):

"'Value' ... means ... (i) with respect to securities for which market
quotations are readily available, the market value of such securities." Not
their future prices.
http://www.law.uc.edu/CCL/InvCoAct/sec2.html

- quote -

Arithmetic alone doesn't require this conclusion. Consider a fund with 1/2
its assets in overnight loans, and 1/2 its assets in 10 year zeros. Average
Macaulay duration is a bit under 5 years.
http://www.finpipe.com/duration.htm

Turnover rate = 50%/day, or about 18000%/year. That's assuming no sales
till maturity.

As it turns out, this extreme example is not that far off. PTTRX's top 10
holdings account for 1/2 of the fund, and they are mostly short term
futures, maturing this year or next year.
http://quicktake.morningstar.com/Fun...dtab=portfolio
(or at least they were when this snapshot was taken at the end of 2005;
obviously the holdings that already matured have been replaced).


--
Mark Freeland
nNeEwTs[at]sonic.net

In article <m3mzdwmuen.fsf[at]animato.home.lan> , Rich Carreiro <rlcarr[at]animato.arlington.ma.us> wrote:
- quote -

You don't lose (or make) money on an individual bond unless you choose to sell
before maturity.

Bucky wrote:

- quote -

Of couse they are. To answer the OP's question I looked at the fund's
information, their turnover is 470% on a duration of over 3 years. No
sales till maturity would offer a turnover of less than 35%. Their
average holding period is less than 3 months.
JOE

iarwain wrote:
- quote -

They're not selling the bonds. They're required to price the NAV at the
current market value of the underlying investments. Even if they're
committed to holding the bonds until maturity, they are not allowed to
price it at the future expected value.

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote in message
news:m31wv8mhdp.fsf[at]animato.home.lan...
- quote -

Many bond funds manage their portfolios like ladders - they have some short
bonds, some intermediate bonds, some long bonds - the bonds average out to
an intermediate duration. As the funds hold their bonds and time passes,
the long bonds become intermediate bonds, the intermediate bonds become
short term, and the short term bonds?

They mature, and the fund reinvests in long term bonds to get the higher
rates that those bonds provide (in the normal, non-inverted yield
situation), and average out the duration of the short term bonds (formerly
intermediate term) remaining in the portfolio.

"While no bond fund will come out and say that they've set up a laddered
portfolio, money managers stagger bonds within their funds so that different
maturities come due at various times."
http://www.siebertnet.com/retirement...nvesting6.html
(SmartMoney)

- quote -

Possibly descriptive of the way some bond funds are run (I don't personally
focus on yield), but not a fair description of the fund that the OP
originally asked about, PTTRX. Bill Gross is adamant about seeking total
return:

"More than 30 years ago, PIMCO and Mr. Gross pioneered a new approach to
bond investing that focused on total return - income plus capital
appreciation. This approach, utilized in many PIMCO products, has been
critical to PIMCO Total Return Fund's long term track record."
http://www.allianzinvestors.com/docu...turn_ab552.pdf


--
Mark Freeland
nNeEwTs[at]sonic.net

Rich Carreiro <rlcarr[at]animato.arlington.ma.us> writes:

- quote -

[snip]

- quote -

[snip]

- quote -

[snip]

And third and most importantly, as interest rates rise, the values
of the bonds held drop. So even if the fund held the bonds to
maturity, that wouldn't guarantee a lack of loss to investors (unless
those investors also held on to the fund until the bonds in the fund
matured).

To keep things simple, imagine a fund that's buys a bunch of
bonds and is going to hold them to maturity (and there are
plenty of unit trusts which do just that). If you buy shares
of that fund today, and then next week interest rates rise, the
value of the funds' bonds will drop and therefore so will the
value of the fund and your investment in it. Sure -- eventually
the bonds (and so the fund) will reclaim that drop as they march
on to maturity -- but in the here and now they lost value amd if
you had/need to sell your shares in the fund next week, you'll
take a loss.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"iarwain" <iarwain_8[at]hotmail.com> writes:

- quote -

First, because the fund has an a given investment style/philosophy.
If the fund is a "Intermediate-Term Corporate Bond Fund", the fund is
going to want to keep the average duration of its portfolio at a
number appropriate for a an intermediate-term fund. If interest rates
start rising and the fund decided to hold onto its bonds, then the
average duration will get shorter and shorter and eventually the fund
won't be an intermediate-term fund anymore.

Second, because current yield is something lots of investors look for,
even at the expense of total return. If interest rates rise and the
fund sits pat, its current yield will fall relative to other similar
investments, putting it at a competitive disadvantage. By trading old
bonds for new ones, it can bring its current yield up to be more in
line with other offerings.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

iarwain wrote:
- quote -

Think of a mutual fund that holds just one bond paying 4% coupons, worth
$10,000 at the moment. Let's say the fund's NAV is $10.00 at that time.
If interest rates shift upwards rapidly, the bond still pays its 4%
coupon and the value of it drops to match the yield dictated by the
current bond market - let's say, it drops in value to $9800. The NAV of
the fund is now $9.80. It doesn't matter whether the manager sold the
bond or not, the coupon didn't keep up with the drop in bond value.

A bond fund is just a big pot of bonds so it works the same way for the
entire fund's NAV.

If the fund doesn't sell the bond (unusual, in reality), it's redeemed
at $10,000 at maturity and pays 4% coupons along the way. So what you'd
see is both interest payments paid out to you as well as a gradual rise
in NAV back to $10. This is purely in hypo-land, don't parse it too closely!

So the question isn't so much whether the fund would sell the bonds at a
loss rather than hold them, but whether you would sell the fund at a
loss rather than hold it.

An exception would be a bond fund that makes changes to the average
maturity of its bonds, based on predictions about interest rates, and
gets it wrong - consistently. For example holding a lot of long-term
bonds through a period that long-term rates rise a lot, then saying oh
heck, let's shift to shorter maturities, right when shorter maturities
start to shift in the wrong direction. Or, a fund that buys bonds that
it thinks will improve in credit quality, but they then actually
decline, and the fund sells off the bonds at a loss (repeat). You can
think of scenarios where you just keep peeling off more and more NAV and
the interest collected on coupons doesn't produce a positive "total
return". Of course this is more of a hypothetical than something you'd
necessarily see with PTTRX.

-Tad

"iarwain" <iarwain_8[at]hotmail.com> writes:

- quote -

The fund isn't necessarily selling the bonds at a loss. NAV for a bond
fund is computed the same way as for a stock fund; what counts is the
current market value of the assets held by the fund.

-Sandra

I'm familiar with the relationship between bonds and interest rates. I
guess what I find confusing is why the fund would sell the bonds at a
loss rather than hold them.

iarwain wrote:
- quote -

I'll reply using some simple math to illustrate;

A bond out there has a face value of $10,000 and matures in exactly one
year, no interest payouts (zero coupon) in the meantime.

If interest rate was 4%, the bond would be worth;
$10,000/1.04 = $9615.38

This is what you'd pay today to get $10,000 in one year at a simple
return of 4%.

Say, instead, the rate is 4.5% a small change,
$10,000/1.045= $9569.38

The value changed from $9615.38 to $9569.38, about 1/2%.

This is the 'back of envelope explanation'. If instead of 1 year, the
bond were a zero 5 years to maturity, you'd have about a 2.5% swing in
price. A bond paying interest twice a year would have a bit less change
as the interest paid can be reinvested at a higher rate. Thats called
"duration". (i.e. a zero coupon bond's duration is equal to its
maturity. Duration can be thought of as the average weighted maturity of
the bond taking into account the interest paid along the way. Your fund
will likely state the duration of its holdings and you can figure how
rates will affect its value).

For this example, you can simply decide to hold the bond to maturity and
get the $10,000.

The bond fund will have many bonds, with varying coupons and maturities.
Also, the manager can buy and sell bonds, not holding them till they
mature. In a rising interest rate environment, the current value will
drop as illustrated above for the whole portfolio.

Your fund has a huge turnover 470% (4.7 times) per year. And the
duration is stated as 3-6 years. You should be able to contact them
directly, to get a more precise number.

I hope that helped.

JOE

"iarwain" <iarwain_8[at]hotmail.com> writes:

- quote -

The same way you lose money on an individual bond -- interest rate
increases.

- quote -

Yes, defaults are one way, but for non-junk bonds it is interest rate
increases that are the primary cause of loss.

Imagine you have bonds that identical in maturity and credit
rating, but one has a 5% coupon on the other has a 3% coupon.
Which one would you pay more for?

Another way to put it is that the market will force bonds
of similar maturities and credit risks to trade at the same
yield-to-maturity. But if one bond has a lower coupon than
another, that bond will have to trade at a lower price in order
for the YTM to match the others.

So if you buy a bond when overall interest rates are at 3%,
and then overall interest rates rise to 5%, the price of your
bond will drop so that its YTM for new buyers will be 5%.

For an individual bond, you can always choose to hold to
maturity and so guarantee (absent default) you won't lose
anything. But if you want/have to sell before maturity
you can certainly end up taking a loss.

And since bond funds are just collections of bonds, the
inverse price/yield relationship applies to them, too.
Plus, since funds never mature, there's no way to hold
anything to maturity and thus guarantee lack of loss.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

PTTRX is an intermediate term, ~ 90% investment grade bond
fund. The Fed has raised interest rates this past year. This
means that old bonds (held, say, in PTTRX) previously
yielding X just before an interest rate increase have to
compete against new bonds yielding {X + a positive number}
after the interest rate increase. How do bond buyers respond
to the old bonds? They bid lower, since they can get the new
bonds at a better yield. This forces the old bonds' prices
down, thus forcing the old bonds' yields to be higher and so
competitive with new issues.

So PTTRX's (and other intermediate, high grade bond funds')
NAV is down a bit. But its dividend/interest yield is still
over 4%...

The chart below may give more perspective:
http://finance.yahoo.com/q/bc?s=PTTR...=on&z=m&q=l&c=

Note that the NAV varies about +/- 0.7% from the mean. (I'm
eyeballing that.) For older intermediate term high grade
bond funds, I expect the variation is more.

In theory if one reinvests dividends/interest from this fund
into new shares of it, things should smooth out over the
long-term.

As for defaults, from finance.yahoo 's "holdings" section
for this fund, there appear to be so few junk-rated bonds in
this fund that I wouldn't expect defaults to explain much,
if any, of the decline.

Personally, in this slowly rising interest rate environment
(knock on wood), I advocate bond ladders, with bonds held to
maturity of course. Right now, I wouldn't buy a bond or CD
going out more than a year. The Fed is talking about another
increase rate raise in a month or so. Our naive, gone
bananas, consumer stock buyers keep pushing stocks up to
arguably unsustainable levels, so I'm all for more interest
rate increases.

"iarwain" <iarwain_8[at]hotmail.com> wrote
- quote -

"iarwain" <iarwain_8[at]hotmail.com> writes:

- quote -

Defaulting is one way a bond fund can lose money, but that's probably
not what's going on here. The problem is that interest rates have
gone up. Say I buy a bond that pays 4% interest. As long as
prevailing interest rates remain the same, I can resell my bond to
somebody else for the same as what I paid for it. Now suppose
interest rates go up, and there are new bonds being issued that pay 6%
interest. Suddenly, my old 4% bond isn't worth so much any more.
It's still paying 4%, but why would anybody buy a 4% bond instead of a
6% bond unless they can get it at a discount? That's why the NAV of
bond funds generally has gone down. Intermediate and long-term bonds
are more affected by interest rate sensitivity than short-term bonds.

PTTRX, BTW, is a very highly-regarded bond fund; you're lucky to have
access to the low-cost institutional-class shares through your 401(k).

-Sandra

PTTRX is a bond fund that is an option in our 401k at work. I don't
own any of it at present but I can't help but notice that it's down
over the past year. How does a bond fund lose money? It seems like
this should be one of the safest buys out there, especially while the
stock based mutual funds are all having good years. Is it just a case
of companies defaulting on their bonds (not sure if that's the right
term)?