Here are the facts as I see them, let me know if something is incorrect:
- You can only make money on BND through the yield (1.95%) or NAV gains which are tied indirectly to interest rates going down
- You can lose money on BND through NAV loses which are tied indirectly to interest rates going up
- The interest rate risk for BND is 6.9% (derived from avg duration) per 1% move in bond yields (which are correlated to general fed interest rates
- Convexity of bonds is the only thing that kind of offsets the Interest rate risk formula
- While everything is possible, there is no one prominent saying rates may go negative with the current inflationary environment
- There is also NAV changes based on market forces (supply/demand)
- Even with lowering interest rates, market forces were so strong during the 2008 crash that bonds went down about 7%
- I get $10,950 in yield after a year
- If rates stay the same, NAV stays the same
- If rates go down, I make money on NAV increases. Current Fed Fund Rate is .08 even though they are saying they are planning on raising, if they go down another .25 into negatives I make $17,250 (~1.725%). Possibly a little more because of convexity.
- If rates go up, I lose money on NAV decreasing. .25% and I lose $17,250. 1% increase over a year and I lose $69,000
- During a crash like the 2008 recession, I would potentially lose another $70,000 or so in NAV from market forces
Does that sound correct?