Assume the following:

  • we are running a constant maturity bond fund (10yrs)
  • all zero coupon bonds
  • to maintain the maturity, we buy bonds of 10y and sell the 9y bonds 1y later
  • price of 10y bond is 100, price of 9y bond is 99

Now..the bond fund consistently buys high and sells low, after a long time the fund will go to zero.

It seems that yield curves have been sufficiently negative for this type of situation to occur? Where a constant maturity bond portfolio's returns over some time frame no longer approximate the returns of just buying a bond outright and holding it to maturity.

Does this thinking check out? I feel like I've gone wrong somewhere

thanks for the help!

The inspiration for the question comes from this article, which makes the point that buying individual bonds have a similar profile return profile to a constant maturity fund in that :

  • individual bonds roll to maturity (earning the actual ytm)
  • constant maturity bond portfolios earn the forward rate in the period that they're rolling down between (eg 10y to 9y)




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