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investing bond-etf

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March 14, 2025 Score: 4 Rep: 1,207 Quality: High Completeness: 30%

This is a good question, but it is not the best one in terms of understanding the impact of changing interest rates and new bond issues on an iBond. A better question is "assuming I make only a single purchase at a certain point in time in a certain iBond, will my initial investment be rising to a different amount at the term of the iBond than suggested by the YTM at the time of my purchase given changing interest rates and new bond issues in the future?"

The answer is no because whatever the new interest rate becomes in the future, the iBond's price at the time will immediately reflect the new interest rate which will become its new YTM.

If the new YTM is lower than the initial one, then yes, the iBond's price will increase more slowly from then on, but prior to the new YTM, the iBond's price will have increased faster than the initial YTM. The opposite will happen if the interest rates increase after your purchase, but the amount your initial investment will reach by the term will not change either. That is, the changes in interest rates and the purchasing (or not) of new bonds at those new rates by the iBond will affect the trajectory of the growth of your investment, but it will not affect its final amount.

Note that (again) this analysis is valid assuming you do not make any purchases in the future when the interest rates are changed and it can be proven mathematically without too much ado, but my impression is this is not exactly what you are looking for at this time (and this stack exchange does not support mathematical formulas well). Pls let me know if otherwise.

March 14, 2025 Score: 5 Rep: 147,903 Quality: Medium Completeness: 30%

It depends on the details in the prospectus, but if the name is a proper reflection of the objective, It is very likely that they will buy additional bonds in the future that mature in Dec 2034, and your "yield" may change along the way to match the market yield for the timeframe at the time.

However, in your scenario, if the yield of 2034 bonds goes from 4% to 1%, then the value of the current 2034 bonds will go up, partially offsetting the lowering of the yield. So while the interest that the fund pays may go down, it will increase in price. So your total return will likely not drop to 1%, but you'll have to sell units to realize the price return.

Remember that bond funds are NOT "fixed income" securities, meaning you are not guaranteed a particular interest rate like you are with individual bonds. They go up and down in value based on the bonds that they hold, and the interest they pay can fluctuate as well. They're generally more stable than equity funds, but they do not pay a fixed interest rate.

If you want to guarantee a particular interest rate between now and 2034, then buying individual bonds may be a better choice. Even then, you do have opportunity risk with individual bonds. What if interest rates go up between now and 2034? You're stuck with bonds that pay a lower than market interest.

March 15, 2025 Score: 1 Rep: 111 Quality: Low Completeness: 30%

A term-limited bond ETF like this is not really like a traditional bond fund (which tries to maintain a position in bonds that are always approximately a certain distance out from maturity). This fund tries to emulate the performance of buying and holding a bond today that matures in 2034, and will cease to exist in December 2034.

But what if in, say, 2031, the US government issues a bond maturing in 2034 with a YTM of 1%?

So what we really need to understand is the effect of this on the existing bonds. Imagine in this hypothetical world, today, you buy a $100 bond that matures in 2034, paying a 4% coupon. Then, in 2031, that your friend wants to buy a $100 bond maturing in 2034. The US government will pay 1% per year on this. Alternatively, your friend could buy the bond (still backed by the government, mind) from you.

You'd be a fool to sell it for $100, because you'd lose out on the higher coupon that's no longer available. The bonus to your friend's fixed income doesn't materialize out of nowhere; it comes out of your opportunity cost. To be fair, you'd have to charge something close to $109 (because of compounding etc. it'd be slightly different).

And that's exactly what the bond market does: it gives you the opportunity to sell your not-yet-matured bond, for the fair price (assuming the efficient market hypothesis - which appears to be a much better assumption for bonds than it is for equities).

The same happens with your ETF. As time progresses and people buy or sell the ETF, Blackrock will have to sell its existing bonds and/or buy new ones expiring in 2034 to match (or possibly some other sufficiently similar securities, to some extent - according to the details in the prospectus. And of course they take some small amount of management expenses off the top, and you assume additional risks related to the added complexity of this arrangement vs. just buying the bond.) But if interest rates fall, that drives up (and vice-versa) the per-share value of the ETF, commensurate with the bond market's valuation of the underlying. In principle, all of this is agnostic to when the underlying securities were bought: if they sell their existing bonds and buy new ones with the same date of maturity, there should be no material change in expected value. It does mean that the fund's yield may be out of sync with the "yield curve", but this is again compensated by the price of the ETF shares.

(The pitch for an ETF like this is that it "trades like a stock" while giving you something close to the underlying bond's performance. Directly trading bonds as a retail investor is not necessarily easy to arrange; and there may also be differing tax treatment.)