First a soft sigh, then a pitying look: When it came to bonds, money managers of all stripes reacted surprisingly similar until recently.

The sighs were usually followed by sentences like “The low-interest phase will be with us for a long time, there is nothing more to be gained from bonds”.

As a result, the conversation mostly revolved around stocks.

Dennis Kremer

Editor in the “Value” section of the Frankfurter Allgemeine Sunday newspaper.

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That has changed radically.

Bonds are getting more attention than they have in a long time.

The return of interest rates is an issue, especially in Germany, because quite a few people remember the times when there were high yields for Bunds.

It is hard to imagine today that there will ever be a return of six percent on German government bonds with a ten-year term, as was the case in the mid-1990s.

But a little more than two percent as is currently the case after the year-long phase with interest rates close to or even below zero percent is definitely an improvement.

However, this joy at the return of interest rates comes with what appears to be a strange experience bond investors have had over the past year.

Anyone who relied on the performance of euro bonds or bonds from all over the world with the help of index funds (ETFs) sometimes couldn't believe their eyes.

Instead of benefiting from the return of interest rates, 2022 will go down in history as one of the worst bond years ever: investors made losses of almost 20 percent with their bond funds.

This has only happened a handful of times in a hundred years.

The losses are irritating, but also show that not everything is as it first appears when it comes to bonds, especially bond ETFs.

So it's time to clear up a few misunderstandings.

And secondly, to clarify the question,

Rising interest rates are unpleasant for some

Let's start with the misunderstandings.

The number one misconception about bonds is that rising interest rates are good.

This is only true for all those investors who now put a single bond in their portfolio and hold it until maturity.

For example, if you buy a ten-year federal bond now and hold onto it to the end, you will receive a higher interest rate than if you had bought the bond a year ago.

On the other hand, anyone who wants to sell older bonds before the end of their term is faced with a problem these days: Since these bonds are less attractive than the new paper due to the generally higher interest rate level, their price automatically falls.

So investors can only sell them at a discount.

Even if it is counterintuitive at first: For everyone who wants to make money from changes in bond prices,

A single bond also works differently than a bond ETF, which brings us to misunderstanding number two: Contrary to what might be expected, a bond and a bond ETF can by no means be equated.

The main difference is: "At the end of the term of a bond, investors always get their money back, provided the issuer does not go bankrupt," says Ali Masarwah, fund specialist at the analysis company Envestor.

“A bond ETF, on the other hand, has no such built-in repayment guarantee.

Investors here are much more dependent on price developments on the bond market.”

To understand this, you have to take a closer look at how bond ETFs work.

They track the performance of certain bond barometers, such as European corporate bonds with good ratings or euro government bonds.

Much like stock ETFs, this tracking is done in that the bond ETF buys all the bonds in the index according to their weighting.

A “constant duration risk” is important

Contrary to what one might think, the ETF does not usually hold the bonds until the end of their respective term, but exchanges them before they expire.

In addition, it always includes all newly issued bonds from the segment that it represents.

The average term of the bonds in an ETF and the bond barometer it is based on always remains the same; for a global bond index, for example, just under seven years is normal.