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Bonds and Convexity

What Else Ya Got

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

With the large move in Bonds, they are once again nearing all time highs. Additionally, there have been recent monetary policy changes that have occurred which suggest that bonds could go higher. That being said, should we get long bonds like the rest of the herd?

Today, Tom Sosnoff and Tony Battista look at how changes in interest rates will affect the prices of bonds. This relationship is known as convexity. The guys look at how much a bond will increase or decrease given a change in interest rates. They see that the change in the price of bonds is not linear when compared to the change in the interest rate. Here they see that increases in rates will cause prices to fall much more quickly when the price would increase if rates fell. Additionally since the notional value of bonds is higher at these levels, more capital is required to get long bonds at these levels, leading to additional risk!

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