From mpollak at panix.com Sat Jun 26 02:05:17 1999
But why is the bond market is always said to "rally" when
interest rates go down, and said to take a hit when they
go up?
Because what's "rallying" is the price, not the interest rate. That's probably too simple of an answer, though.
That makes it seem like bondholders would always want
*lower* interest rates to increase their capital gains.
A bond*holder* is not directly affected by interest rate changes; if I buy a 6% bond and then it goes to 6.5%, what do I care other than the lost opportunity of having waited and bought the cheaper one? I might care if it went to 4% and my bond matured, because I was getting 6% and now the best I can do with my money when I get it back is invest it somewhere for 4%.
While it's true that if interest rates go down that your bond may very well trade above par, if you sell it and capture a capital gain, you probably won't get enough to make up for the fact that you then have cash that you presumably need to invest and will receive much less interest on. Of course you've also removed your risk of default ...
/jordan