TLT and SHY vs owning LT and ST outright?

[gonetowindsurf]

Is there someone that wouldn't mind helping me the bond aspect of PP?
I gather the reason to owning LT/ST outright is that your principal and interest is locked in?
But does it fluctuate similarly to TLT/SHY?
Would my portfolio show an increase/decrease in face value and/or interest rate?
For instance, TLT's price is down about 7% from its peak August.(If I would have bought at the peak) Would my bond show a similar loss in value? and if so, would the interest be adjusted too?
Additionally, how difficult is it to sell a LT bond, especially if it is at a higher face value\/lower interest? when it would come time to re-balance? Would I need to adjust the face value price? to possible attract buyers? This aspect of owning the bond outright is all new to me.

I guess the question could also apply to GLD versus physical?
What kind of market and cut/ is involved in buying and selling physical gold come re-balance time?

any insight would be greatly appreciated.

[MediumTex]

Is there someone that wouldn't mind helping me the bond aspect of PP?
I gather the reason to owning LT/ST outright is that your principal and interest is locked in?

No.  It is just a simpler way of owning the underlying bonds.

But does it fluctuate similarly to TLT/SHY?

Yes.

Would my portfolio show an increase/decrease in face value and/or interest rate?

Market value will be determined by current rates.  A 4.25% bond will always be a 4.25% bond, but it may be priced at 90 or 110 depending upon current rates.

For instance, TLT's price is down about 7% from its peak August.(If I would have bought at the peak) Would my bond show a similar loss in value? and if so, would the interest be adjusted too?

Yes, underlying bonds would have performed similarly.  No, interest rate on bonds would stay the same (though the pricing of the bonds would reflect the changes in interest rates).

Additionally, how difficult is it to sell a LT bond, especially if it is at a higher face value\/lower interest? when it would come time to re-balance?

The U.S. treasury market is probably the deepest and most liquid market in the history of the world.  The price of a bond is set every day and an intra-day quote is available when you are ready to buy or sell.

Would I need to adjust the face value price? to possible attract buyers? This aspect of owning the bond outright is all new to me.

No.  The current value of your bond is set by the market.

I guess the question could also apply to GLD versus physical?

That's a bit different, but same concept, though there are a lot more "paper gold" critics than "paper bond" critics.

What kind of market and cut/ is involved in buying and selling physical gold come re-balance time?

You will pay 3-5% over spot when you buy and you should be able to sell right around spot, depending upon the market.

any insight would be greatly appreciated.

I hope that is helpful.

[gonetowindsurf]

MediumTex - you da man - thanks for the education.
Would it be ok for a follow up?? I am still a bit confused.

"Yes, underlying bonds would have performed similarly.  No, interest rate on bonds would stay the same (though the pricing of the bonds would reflect the changes in interest rates)".

So the underlying bond in my portfolio is also down 7% but it does not have a higher interest rate to compensate? who would want to buy it?

Perhaps I have a wrong assumption - I am assuming the interest rate on TLT fluctuates based on price?
But perhaps this is wrong?

If TLT is down 7% from August peak, I would assume the yield has risen to compensate because it is current?

so

Wouldn't TLT be a better investment because my outright treasury is taking a hit without the interest rate compensation?

I am missing something here for sure 

thx for my continuing education!

[MediumTex]

MediumTex - you da man - thanks for the education.
Would it be ok for a follow up?? I am still a bit confused.

"Yes, underlying bonds would have performed similarly.  No, interest rate on bonds would stay the same (though the pricing of the bonds would reflect the changes in interest rates)".

So the underlying bond in my portfolio is also down 7% but it does not have a higher interest rate to compensate? who would want to buy it?

Perhaps I have a wrong assumption - I am assuming the interest rate on TLT fluctuates based on price?
But perhaps this is wrong?

If TLT is down 7% from August peak, I would assume the yield has risen to compensate because it is current?

so

Wouldn't TLT be a better investment because my outright treasury is taking a hit without the interest rate compensation?

I am missing something here for sure 

thx for my continuing education!

If I sell you a bond that pays 4.25% when the prevailing market rate for similar bonds is 4.25% I can sell it to you for 100.

If I try to sell you such a bond when rates are 4.5%, I may only be able to get 95 for the bond, due to the current market rate of interest on similar bonds.  If bond yields have fallen to 4% when I get ready to sell my 4.25% bond, I might be able to sell it for 105.  That's what they mean when they say bond prices rise when yields fall.

It's pretty simple, it just takes a little practice.

Most of your questions will be answered when you absorb the concept of how bonds are priced.

And to answer your TLT question, it's about the same as owning a LT treasury bond with 20 years to maturity.  No better or worse, other than the risk of having someone between you and the actual bond.

[Jan Van]

FYI, this is what shows in my account for the bonds I own outright:

August 24:
U S TREASURY BOND CPN 3.87500 % MTD 2040-08-15 DTD 2010-08-15  value: $15,862.50
October 18:
U S TREASURY BOND CPN 3.87500 % MTD 2040-08-15 DTD 2010-08-15  value: $14,704.65

[6 Iron]

Using TLT will cost you more than direct ownership of bonds to the tune of 0.15% of your holdings less the costs of trading for those buying and selling individual bonds. I use TLT; originally I had planned to move to direct bond ownership, but after discussion with my wife, she likes the idea of not having to manage the long bonds should something happen to me. 

[gonetowindsurf]

Thanks MediumTex, JMourik, and 6 Iron -  I get it now.