I was reading that bond price is inversely related to bond yield, and I was wondering if you had a significant amount of money in a 401k in bonds can you actually lose money on the bonds as yields go up?
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Question About Bonds
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Last: 4 days ago by Bayou City
Yes, but I'd imagine if in a 401k the bonds are held within a mutual fund or ETF, which will absolutely lose value when yields rise.
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The answer is…yes.
And the longer duration the more they'll go down
And the longer duration the more they'll go down
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Thanks for the information. You always hear that bonds are a risk free asset but I guess it depends on where the bonds are located and how fast yields rise.
Old low rate bonds if you sell them you have to match market rate. So you have to sell lower than the nominal rate they hold. To match the market.
lobopride said:
Thanks for the information. You always hear that bonds are a risk free asset but I guess it depends on where the bonds are located and how fast yields rise.
Not all bonds are risk free - just US Treasury securities. The price will still fluctuate but considered risk free because there is virtually no chance of a default. So far.
You could structure a spread where the holdings eliminate duration while maximizing positive convexity. That would insulate you from losses when yields rise.
They could, but they were asking if bonds can lose value so
"Risk free" doesn't mean market price won't (temporarily) go down over the term, just like it doesn't mean there's no inflation risk or reinvestment risk.
It means you'll get face value back at the end of the term - if you hold the individual bond...which you almost certainly don't ever do inside of a 401k.
It means you'll get face value back at the end of the term - if you hold the individual bond...which you almost certainly don't ever do inside of a 401k.
mosdefn14 said:
"Risk free" doesn't mean market price won't (temporarily) go down over the term, just like it doesn't mean there's no inflation risk or reinvestment risk.
It means you'll get face value back at the end of the term - if you hold the individual bond...which you almost certainly don't ever do inside of a 401k.
Thanks. My friend is nearing retirement and he has all his money in a 2030 retirement fund which is almost all bonds. I have a feeling he's going to regret this.
At retirement can you not take the bond yield and dont sell shares
That a target date fund. They're the worst. His losses or gains will be dependant on the velocity of rate changes, positive or negative convexity, duration, credit spreads, liquidity and inflation.
Bonds dont sell in shares. You can strip the coupons off yes.
lobopride said:mosdefn14 said:
"Risk free" doesn't mean market price won't (temporarily) go down over the term, just like it doesn't mean there's no inflation risk or reinvestment risk.
It means you'll get face value back at the end of the term - if you hold the individual bond...which you almost certainly don't ever do inside of a 401k.
Thanks. My friend is nearing retirement and he has all his money in a 2030 retirement fund which is almost all bonds. I have a feeling he's going to regret this.
Ooof.
You should have him look at the expense ratio on that target date. For an almost 100% bond fund, it shouldn't have a crazy high expensive ratio but some target date funds charge a crazy expense ratio for the service provided.
"Can you lose money"
Yes and no. Yes if you sell. No if you hold to maturity
Yes and no. Yes if you sell. No if you hold to maturity
Texaguser17 said:
"Can you lose money"
Yes and no. Yes if you sell. No if you hold to maturity
holding to maturity could 100% have a negative real rate of return...you could be locked in making a marginal amount of interest when real rates are much higher, inflation higher, etc...I would 100% say you are losing in many scenarios locked in on a LT bond with garbage yield
True but that's more or less opportunity costs. Not really what I took as the OPs question. Which depending on where one is at wealth preservation may be more important than arbitrary portfolio metrics.
lobopride said:mosdefn14 said:
"Risk free" doesn't mean market price won't (temporarily) go down over the term, just like it doesn't mean there's no inflation risk or reinvestment risk.
It means you'll get face value back at the end of the term - if you hold the individual bond...which you almost certainly don't ever do inside of a 401k.
Thanks. My friend is nearing retirement and he has all his money in a 2030 retirement fund which is almost all bonds. I have a feeling he's going to regret this.
Using near year target dates or long bond funds in a rising interest rate environment thinking they're "conservative"?
You'reGonnaHaveABadTime.gif
It may not be as bond-heavy as he thinks. I checked several of the big 2030 target date funds, and they're currently around 55-60% stocks. So there's still a lot of stock market risk in there.
On the bond side, yes, rising rates do hurt bond prices. Duration is basically a measure of how sensitive bonds are to changes in rates. If the bond part of the fund has a duration of about 6 years, and rates go from 4% to 5%, you'd expect roughly a 6% drop in that part of the fund.
But as the fund buys new bonds, it gets to buy them at the new, higher rates. That helps make up for some of the price drop over time.
On the bond side, yes, rising rates do hurt bond prices. Duration is basically a measure of how sensitive bonds are to changes in rates. If the bond part of the fund has a duration of about 6 years, and rates go from 4% to 5%, you'd expect roughly a 6% drop in that part of the fund.
But as the fund buys new bonds, it gets to buy them at the new, higher rates. That helps make up for some of the price drop over time.
I'd be buying US Treasuries if I were you guys. I purchased a bunch last year at around a 4.7% yield.
Before this latest sale, yields were at 5.36% for the 10 year!
Before this latest sale, yields were at 5.36% for the 10 year!
BREAKING: US 10-year bond yield just dropped as the US government sold $39 billion of 10-year bonds.
— Bull Theory (@BullTheoryio) October 7, 2026
Demand was strong, so investors accepted a lower yield than expected.
The yield went from 5.365% to 5.271% in under 4 hours. pic.twitter.com/N1VgWX91k2
I've been steadily buying.
10 year down big this morning. 5.34% and rising. Technicals show this train isn't slowing down.
If you purchase actual bonds and hold to maturity you get 100% of your principal back plus the coupons. Duration risk is only if you sell early. If you buy bond ETF though you will not get your principal back because it functions like a stock and not a true bond.
Edit: the 20yr and 30yr yields on treasuries needs to increase dramatically to compensate for the substantially longer duration risk. Managed money is piling in the 2yr treasuries at the moment because yield is 4.762% for only 2 year duration. For anyone to accept a 20+ treasury they need equity market-like yield. 9%+… the bond market is signaling a nasty future…
Edit: the 20yr and 30yr yields on treasuries needs to increase dramatically to compensate for the substantially longer duration risk. Managed money is piling in the 2yr treasuries at the moment because yield is 4.762% for only 2 year duration. For anyone to accept a 20+ treasury they need equity market-like yield. 9%+… the bond market is signaling a nasty future…
CETES in Mxico have been CRUSHING IT. We were getting over 10% on 2yr and 13% on 20 year.
If you want to replicate owning actual bonds in a 401K or IRA you might want to check out ishares ibonds. They have a set duration and liquidate once they reach the designated duration. You can build a bond ladder using them. I don't own any and am not making a recommendation one way or the other.
mosdefn14 said:
"Risk free" doesn't mean market price won't (temporarily) go down over the term, just like it doesn't mean there's no inflation risk or reinvestment risk.
It means you'll get face value back at the end of the term - if you hold the individual bond...which you almost certainly don't ever do inside of a 401k.
Claude is telling me that a $10,000 investment in US Treasury notes for 5 years
$220 paid every six months
face value in 5 years
equals total 12,200 return on 10K investment guaranteed
as long as the USA doesn't default
LMCane said:mosdefn14 said:
"Risk free" doesn't mean market price won't (temporarily) go down over the term, just like it doesn't mean there's no inflation risk or reinvestment risk.
It means you'll get face value back at the end of the term - if you hold the individual bond...which you almost certainly don't ever do inside of a 401k.
Claude is telling me that a $10,000 investment in US Treasury notes for 5 years
$220 paid every six months
face value in 5 years
equals total 12,200 return on 10K investment guaranteed
as long as the USA doesn't default
That's exactly right which equals 4.4% annually. If that's in your IRA and you're taking RMDs by year 5 you're losing money. If you're fine with that, have at it. The bond slice in my entire portfolio is income stocks, mostly blue chip. If the market tanked 20% I'd still be way ahead of any bond portfolio I would have taken in the past 10 years.
Risk free means no chance of default. It has ABSOLUTELY nothing to do w reinvestment or inflation risk. That's totally wrong. Reinvestment risk would need to be a zero coupon. Interest rate risk is eliminated if held to maturity. Both of those are independent of the default risk.
Just want that to be clear.
Just want that to be clear.
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