LemonTrades
TL;DR
- A bond ETF holds many bonds and pays you their interest, usually every month. You can buy and sell it like a stock.
- Its price moves opposite to interest rates. Long-term bond funds like TLT swing the most; Treasury bill funds like SGOV barely move.
- Yields today run from about 3.7% on T-bill funds to about 4.8% on long-term Treasuries.
- LemonTrades warns you before every Fed decision and inflation report, the news that moves bond prices.
Bonds pay more now than at any time in years. Here are the main ETFs, and the trade-off between yield and risk.
Why bond ETF prices move
When interest rates rise, older bonds paying less become worth less, so bond prices fall. The longer a bond has left, the bigger the effect. A rough rule: a fund’s price changes by its “duration” times the change in rates.
| Fund | Duration, roughly | If rates rise 1 point |
|---|---|---|
| SGOV | Under 0.25 years | About −0.1% |
| BND, AGG | About 6 years | About −6% |
| TLT | About 16 years | About −16% |
That’s why TLT lost about half its value from 2020 to 2023 as rates jumped, while SGOV kept paying with almost no price change.
Which kind to choose
- Parking cash: a Treasury bill fund such as SGOV.
- Core of a portfolio: a total bond fund such as BND or AGG.
- A bet that rates will fall: long-term Treasuries such as TLT, which rise most if they do.
Taxes
Interest is taxed as ordinary income. Treasury interest is free of state tax, which favors Treasury funds in high-tax states. Higher earners may also owe the net investment income tax. Compare bonds with I bonds and gold.
Sources
Education, not financial advice. All investing involves risk, including the loss of your money. See our disclaimer.
