Menu
Share
Share this story
Close X
 
Switch to Desktop Site

Of bonds, notes, and bills

Q: What is the difference between a Treasury note and a US government bond? Are both subject to interest-rate fluctuations in the same way? Does anything cause the share price of a US government-bond mutual fund to fluctuate besides the interest rate? Is it just a given that a rise in interest rates means that bond-fund prices will fall? Is the increase in interest rates implemented the day of the announcement made by the Federal Reserve chairman? Does the Chairman usually make this announcement before Congress?
D.O., Little Rock, Ark.

A: The difference among Treasury bonds, notes, and bills is tied to their longevity. A bond typically matures in 20 or 30 years; a note in five to 10 years, and a bill anywhere from 91 days to one year.

About these ads

You're right about price fluctuations when it comes to individual bonds, says Ashok Bhatia, comanager of Strong Government Securities and Strong Advisor Bond funds. "It's just math.... When interest rates rise, bond prices fall."

As for bond funds, Mr. Bhatia says a few other things impact the share price. For example, most government bond funds hold a range of assets, including US Treasuries, federal agency bonds such as Fannie Mae, and other mortgage-backed securities. The latter two often move with greater volatility than Treasuries. This year, for instance, Treasury rates have fallen a bunch, but agency and corporate rates have fallen even more.

As for the Federal Reserve, it sets one interest rate - the rate for overnight lending. The Fed meets according to a set timetable, usually eight times a year, when it considers changing this short-term rate. The Fed announces any change immediately after the meeting, and also releases a statement describing its views on the economy and monetary policy.

The Fed's well-known chairman, Alan Greenspan, periodically visits Congress to discuss his views on the economy. But this is unrelated to the actual changing of rates.

Bhatia says all other rates - from 2- to 30-year maturities and beyond - are determined by the market.


Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.