How Did Bond Funds React When Interest Rates Were Going Up

By Wealth Effect Blogger – Your Wealth Effect

October 9, 2012

One of the main concerns I hear when I talk about bonds and bond funds is “what will happen to their prices when interest rates rise”?

This chart from the St. Louis Federal Reserve, shows the month end year over year percentage change in both short term interest rates (this is the red line and it is using the Bank Prime Rate) and long term rates (this is the blue line and it is using the 10 Year U.S. Treasury Bond) during the past 10 years.

2005 and 2010 show the sharpest rise in both short term and long term interest rates so I looked up two large bond funds (PIMCO Total Return and Vanguard Total Bond Index) to find out how they did as interest rates were going up. As a side note, I am not suggesting you should or shouldn’t pick these up. I am merely using these as examples because they are widely held and highly recognizable.

According to Morningstar, PIMCO Total Return (symbol PTTAX) returned 2.41% during 2005 and 8.36% during 2010.

Also according to Morningstar, Vanguard Total Bond Index (symbol VBTSX) returned 2.40% during 2005 and 6.54% during 2010.

2005 returns turned out to be the lowest one year returns during the past 10 years for both the PIMCO Total Return and Vanguard Total Bond Index.

When the worst one year return during the past ten years is still a positive number, it becomes much easier to stay invested as compared to the worst one year return during the past ten years for the Vanguard 500 Index (symbol VFIAX) 2008 down 36.97%.

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The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.