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I'm trying to understand the treasury bond market a little more, specifically why the NYSE 20+ Year Treasury Bond index (AXTWEN) has gone up so much in the last year, e.g. here. I've never really followed treasury bonds much in my "investing career", so any answers / overviews that help me better understand the treasury bond market more in general are appreciated.

Additionally, if you have any thoughts on what would be required for this trend to continue, or what may get in the way of this last year's trend continuing into 2012, please let me know. Thanks

  • Do you understand how current rates correlate to price? Is that your question or are you asking why rates have fallen over the last year? – Pablitorun Jan 13 '12 at 3:05
  • see direxionshares.com/etf/30_year_bear_3x_shares.html it's for an ETF but has a good description of your index as well. – JoeTaxpayer Jan 13 '12 at 4:33
  • @Palitorun -- I don't understand either. If you can help with either I'm grateful – Ray K Jan 13 '12 at 7:33
  • @JoeTaxpayer -- thanks, I saw this fund. I'm trying to understand more what the underlying index is/means, and 2) if possible, why it's risen so much in the last year. – Ray K Jan 13 '12 at 7:34
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The NYSE 20 Year Plus Treasury Bond Index (AXTWEN) is a multiple-security fixed income index that aims to track the total returns of the long-term 20 year and greater maturity range of the U.S. Treasury bond market. The index constituent bonds are weighted by their relative amounts outstanding.One cannot directly invest in an Index.

Index Bond Maturities 24 to 27 Years 20.36% /27 to 29 Years 79.64%

Index Duration 17.47 Years

An oversimplification of how bonds value changes as rates change is they are inversely related based on the duration of the bond. Think of duration as the time-weighted average of all the coupons and the final payment. In this case, a drop in rates of about 1% will cause a rise in value of about 17.4%. Long term rates took a drop in the last year.

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The price of a bond goes up when yields go down. For example, you purchase a 5% bond today for $100 and the very next day the same bond is being offered with a rate of 10%. Will you be able to sell you bond for the $100 you paid? No, you must compete with the 10% bonds being sold so you will have to sell your bond for less than the $100 you paid to compete with the new bonds being sold. Thus, bond prices are inversely related to bond yields.

The 20-year index you cited tracks bond prices and bond prices have gone up over the last 10 years which means bond yields have gone down.

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Why have bond prices gone up? Demand. More investors are moving their savings into bonds. Why? I believe there a couple of reasons. One, US Treasuries are thought to be one of the safest investments. With the financial crisis and increased stock market volatility (see chart below) more investors are allocating more of their portfolios to safer investments.

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Two, a large portion of the US population is approaching retirement (see chart below). These folks are not interested in watching their retirement portfolios potentially shrink in the stock market so they move into bonds.

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