"When they are selling off you are still in receipt of income but there is some capital decay. Now you don't have to realise that capital decay, if you own the bond to maturity there is no loss." Unless the capital decay occurs for a reason. Sunk cost fallacy?
CBs have been gaming interest rates for a long time. So long, we are seeing serious negative effects (loss of income for savers, bank profits affected, pension fund deficits, and in Europe, arb transfer of cash out of the system to the US) But in the long run, markets, not CBs, set interest rates. Question is, how long can CBs hold back the tide?
Angelo, one of the great benefits of bond investment is that returns are fixed at time of purchase. They can reval higher or lower over a bonds life, but assuming the credit quality of issuer is sound, the bonds provide income in all scenarios. You certainly don't have to realise losses.
Andrew, CBs most certainly set short dated funding rates. Long dated rates are set by markets and inflation expectations. We are seeing a scenario currently where the market is forcing the FOMC hand. The market is addicted to stimulus and if CBs take it away the volatility will hardly be contained to fixed income. Fixed income will be the first asset class to go but if that decay is sustained that volatility will spread like wildfire. I agree with you. CBs are totally snookered. Look at what they do rather than say. QE1 ends, S&P drops 20% so they immediately launch QE2. That ends and S&P drops 19% so they go to twist. Talk of ending twist early and we have 'taper' tantrum so they immediately extend. Their is a policy floor at point (down 20%) let's hope data holds up so FOMC can deliver on all that chat and actually hike in Dec. I actually think bonds will rally after that, just like last Dec