ZFL.TO BMO Long Federal Bond Index ETF fell to a new record low Friday - is this an indication of a rising interest rate or a declining rate or a steady rate ? It is possible that at the new record low price investors may have bought in and may reverse to a uptick or it may even fall further to its NAV price what conclusion to draw ?

  • The price of a bond, bond fund, or bond ETF will fall as rates rise. This assumes the product is not an 'inverse' or 'short' fund. Commented Jul 7, 2013 at 2:21

1 Answer 1


At this point, I'm not sure there is a conclusion to draw. Is this new record low price the bottom or just the start of a fall? You don't know for sure unless you know the future. Thus, I'd be careful about what kinds of assumptions you want to take here as there are more than a few ways to interpret things here.

Bond prices and interest rates have an inverse relationship. As bond prices fall, the rates go up as there is a higher perceived yield. For example, consider a bond with $1,000 par value that yields 10% which is that the coupons are $100 per year. Now, if the price of the bond drops to $500, then the yield which is still $100 is now 20% as the 100/500 = .20 or 20%.

As for why the drop, that is subject to a lot of speculation, IMO. Is it merely that there aren't as many buyers of the bonds and thus prices come down to attract buyers? Is it that long-term rates are rising in anticipation of other rates rising in the near future as long-term bonds tend to 20-30 year issues and thus may be priced quite differently than a 3 month note.

If one wants an example of how economics can be tricky and even experts can run into issues, Long Term Capital Management was a hedge fund in the late 1990s that was run by some of the top economists at the time and based on an assumption on Russian bonds never defaulting got liquidated after a bailout. Thus, while some may claim to be experts in economics, they may not always have the answers.

  • My question has more to do not with the ups and downs of this ETF but to learn - what I would like to know from an expert is when a long federal bond index ETF declined - is it because interest rate is rising or falling ? I read earlier a finance news report that states when interest rates fall - bond prices go up - so in case of the long federal bond index ETF going down is the conclusion that interest rates are rising or set to rise ?
    – nazirmo
    Commented Jul 7, 2013 at 0:03

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