Why does Vanguard's Total Bond Market fund keep going down?

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skisk
Posts: 27
Joined: Sat Feb 22, 2014 8:23 pm

Why does Vanguard's Total Bond Market fund keep going down?

Post by skisk »

I wonder if someone could explain why Vanguard's Total Bond Market fund (VBTLX) keeps going down each day lately? I had read here before that bond market funds typically increase in value when interest rates go up, and vice versa. VBTLX increased in value from February 5 until March 6, but has since decreased in value and it is now below where it was at on February 5, despite interest rates being lower than they were on February 5.

Is the reason for the decline that VBTLX also contains corporate bonds, some of which are becoming riskier and therefore worth less? If so, is there a better bond fund that only contains higher grade bonds that moves more in accordance with interest rates?
smectym
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Joined: Thu May 26, 2011 5:07 pm

Re: Why does Vanguard's Total Bond Market fund keep going down?

Post by smectym »

skisk wrote: Wed Mar 18, 2020 9:31 pm I wonder if someone could explain why Vanguard's Total Bond Market fund (VBTLX) keeps going down each day lately? I had read here before that bond market funds typically increase in value when interest rates go up, and vice versa. VBTLX increased in value from February 5 until March 6, but has since decreased in value and it is now below where it was at on February 5, despite interest rates being lower than they were on February 5.

Is the reason for the decline that VBTLX also contains corporate bonds, some of which are becoming riskier and therefore worth less? If so, is there a better bond fund that only contains higher grade bonds that moves more in accordance with interest rates?
skisk, excellent questions. Yes, part of the issue is that due to the effect of the shutdown on practically all corporate revenue streams, credit risk concerns have overwhelmed not just lower-rated “junk” bonds but even investment-grade obligations.

But there’s more to it. On some days, even Treasuries have sold off with stocks—a breakdown in the usual correlation, in which Treasuries typically rise when stocks fall—the “flight to safety” trade.

One possible reason is that investors needing to raise cash are selling everything they can, including treasury securities—perhaps to meet margin calls, or to fund other exigencies.

Also, many hedge funds today employ “risk parity” strategies that involve buying certain ratios of both stocks and bonds on the way up—but selling both on the way down as well.

However, the phenomenon is not well understood and has puzzled many commentators; others on this board perhaps know more, and can provide further explanation.
briansmt4
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Joined: Fri Oct 27, 2017 4:57 pm

Re: Why does Vanguard's Total Bond Market fund keep going down?

Post by briansmt4 »

I believe treasuries are going down in value (yields increasing) because big banks and companies are having to sell them to have cash on hand because there is less coming in. This drives the prices down.
Alex GR
Posts: 161
Joined: Mon Jul 31, 2017 9:17 am

Re: Why does Vanguard's Total Bond Market fund keep going down?

Post by Alex GR »

Could it be that the Bond Market Fund is going down because Bogleheads are selling it to rebalance into equities? :greedy

P.S. Can't believe I am still capable of making jokes considering I am watching my life savings evaporate.
sixty40
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Re: Why does Vanguard's Total Bond Market fund keep going down?

Post by sixty40 »

Alex GR wrote: Thu Mar 19, 2020 7:24 am Could it be that the Bond Market Fund is going down because Bogleheads are selling it to rebalance into equities? :greedy

P.S. Can't believe I am still capable of making jokes considering I am watching my life savings evaporate.
LOL ...
I distinctly remember the crises in 2008, my friend and I were golfing and we joked that l’ll see him at the food line. After a while, just have to find some humor in it. I’m gonna find humor in this crisis very soon.

To the OP, I blame it on market manipulation by speculators wanting to make a quick buck.
njdealguy
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Re: Why does Vanguard's Total Bond Market fund keep going down?

Post by njdealguy »

With my current market timing move early this month, had shifted my 401k plan that was 100% in the Vanguard S&P500 Index fund to 100% on Vanguard Intermediate Term Bond Index fund (VBILX) thinking it was the safer one. While shifting out of the equity index fund has me approximately 30% ahead of when I got out, am still down about 7% on the bond fund and think would have been better off just shifting to be uninvested/cash. Lessons learned and for ignorance of not understanding how bond pricing works and how it declines in value that am now researching!
onourway
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Re: Why does Vanguard's Total Bond Market fund keep going down?

Post by onourway »

I will point out that thus far this year, Total Bond is down merely 0.28%. While I find this somewhat unexpected behavior interesting to read about, I do not see anything that would lead me to reconsider my substantial holdings in this fund. I didn't see any complaints when this fund also behaved somewhat unexpectedly last year with a near 9% return...
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dwickenh
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Re: Why does Vanguard's Total Bond Market fund keep going down?

Post by dwickenh »

onourway wrote: Thu Mar 19, 2020 8:31 am I will point out that thus far this year, Total Bond is down merely 0.28%. While I find this somewhat unexpected behavior interesting to read about, I do not see anything that would lead me to reconsider my substantial holdings in this fund. I didn't see any complaints when this fund also behaved somewhat unexpectedly last year with a near 9% return...
+1
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
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DR
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Re: Why does Vanguard's Total Bond Market fund keep going down?

Post by DR »

I have sort of a related question: I hope that's OK.

I believe that I recall watching the daily percentage change in AGG and noting that as funds like VBTLX and FXNAX reported in after 6 p.m. or so I'd see a very similar percentage change in the price movement of the fund. For example, today, 3/19/2020, the AGG reports a 2.23% increase. Yet today VBTLX and FXNAX report an end-of-day change of -.82% and -.72% respectively.

Maybe I just am remembering things wrong, but it seems that I used to be able to watch the AGG index during the day and note that its percentage change at the end of the day would be roughly equivalent to the change in my total bond fund that tracks that index. It works that way for the S&P and the S&P index tracking funds but it seems now not to be working for the AGG and its index fund trackers.

Or, put differently, why does the AGG ETF stop tracking with the Fidelity and Vanguard AGG clones here in this one-month chart?

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BC_Doc
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Re: Why does Vanguard's Total Bond Market fund keep going down?

Post by BC_Doc »

My Vanguard Canada bond ETF is getting clobbered too.
I hold VSB-T which is a short-term bond ETF with an average duration of 2.5 years. Approximately 2/3 of the holdings are federal and provincial debt with the remaining 1/3 corporate debt.
Market price and Net Asset Value tracked each other nicely until March 5th when they started to diverge, selling at a 0.76% discount.
On March 11th, all hell broke loose, and the ETF closed at a 5.76% discount to NAV.
Discounted widened to 7.14% on March 18th.
If bonds are intended to be the ballast a portfolio, my bond ETFs are currently receiving a letter grade of "D". They may be dropping less than my equities but they certainly aren't zigging when my equities are zagging.
I would be curious to see how the underlying bonds contained in VSB are holding up. I wonder whether or not the NAV of the underlying bonds is accurate?
I am interested to hear what smarter minds than mine think--Bill Bernstein, are you out there? :)

I also hold VAB-T which is similar in many ways to Vanguard's Total Market Fund (duration is a couple of years longer. Over the same period, it has closed at a nauseating discount of up to 9.18% (again, March 18th which I would now categorize as a Really Bad Day for my bond ETFs!).

I am hopeful that the spread between market close and NAV will diminish back to normal as volatility in stock markets diminishes. Here's hoping....
When the spread between market close and NAV narrows to a more normal range, I plan on bailing on these two ETFs. I want cash (but not at any cost)-- equity markets are begging me to go shopping.

Links to the above mentioned bond ETFs:

https://www.vanguardcanada.ca/individua ... nd/?prices

https://www.vanguardcanada.ca/individua ... nd/?prices
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