Vanguard Total Bond Index question- does it act like a bond ladder?

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jdamo
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Vanguard Total Bond Index question- does it act like a bond ladder?

Post by jdamo »

I have a Vanguard Total Bond Index Fund (VBTLX)question- does it act like a bond ladder?

Since VBTLX has a 69% turnover every year and a average duration of 6.41 years, does it act like a bond ladder in a way as the interest rates rise and therefore cut the bond fund's losses we have experienced lately as the fund manager buys new bonds every year? (I can't seem to find the total bond index range of duration, just the average....) Is it a lazy person's bond ladder in a way?

I'm trying to weigh staying with VBTLX vs say taking some % and buying 6 month Treasuries that are yielding ~4.5% now and likely to rise as the FED continues to raise rates into next year, and re-buying them as the curve goes up and stabilizes.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by GP813 »

The rates on BND/VBTLX are rising just look at the distribution yield, also the current 30 day SEC yield is 4.15%.
km91
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

Yes, a bond fund acts as a rolling bond ladder. As old bonds roll out of the index or mature they are replaced with new, higher yielding bonds, and eventually this higher yield will make up for the loss in NAV.

As to your second point, you're basing your decision on something you think is likely to happen in the future, so market timing. No one knows if this will be a good or bad decision. But to give a different perspective on the yield curve, 4.50% yield on 6mo Treasuries is actually signaling that short term rates are perceived as more risky than longer term rates. You get to lock in 4.50% for 6 months but have no idea what rate you'll be able to reinvest the bill at when it matures. The market certainly thinks it will be at a lower rate than where we are now
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by AndyAndTheTuna »

A strategy of riding the yield curve upwards in the current environment is a totally fair one. This isn't "market timing", short term rates are largely driven by a small group of humans that are telling you what they plan to do.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by vineviz »

jdamo wrote: Fri Dec 09, 2022 12:29 pm I'm trying to weigh staying with VBTLX vs say taking some % and buying 6 month Treasuries that are yielding ~4.5% now and likely to rise as the FED continues to raise rates into next year, and re-buying them as the curve goes up and stabilizes.
Market timing bonds is like shooting yourself in the foot with a BB gun.

It might not hurt a lot, but's not even a LITTLE bit of a smart decision.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by GP813 »

vineviz wrote: Fri Dec 09, 2022 1:12 pm
jdamo wrote: Fri Dec 09, 2022 12:29 pm I'm trying to weigh staying with VBTLX vs say taking some % and buying 6 month Treasuries that are yielding ~4.5% now and likely to rise as the FED continues to raise rates into next year, and re-buying them as the curve goes up and stabilizes.
Market timing bonds is like shooting yourself in the foot with a BB gun.

It might not hurt a lot, but's not even a LITTLE bit of a smart decision.
ahahahaha
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

AndyAndTheTuna wrote: Fri Dec 09, 2022 1:09 pm A strategy of riding the yield curve upwards in the current environment is a totally fair one. This isn't "market timing", short term rates are largely driven by a small group of humans that are telling you what they plan to do.
It's exactly market timing. If OP's investment horizon is any longer than six months, the decision to buy a 6mo bill is an explicit bet that rates either rise further or fall more slowly than the market is pricing in. Does OP know more about the FOMC's future decisions than the market as a whole does?
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by AndyAndTheTuna »

km91 wrote: Fri Dec 09, 2022 1:49 pm
AndyAndTheTuna wrote: Fri Dec 09, 2022 1:09 pm A strategy of riding the yield curve upwards in the current environment is a totally fair one. This isn't "market timing", short term rates are largely driven by a small group of humans that are telling you what they plan to do.
It's exactly market timing. If OP's investment horizon is any longer than six months, the decision to buy a 6mo bill is an explicit bet that rates either rise further or fall more slowly than the market is pricing in. Does OP know more about the FOMC's future decisions than the market as a whole does?
Strongly disagree. The aversion towards actually looking at the interest rate environment and what the Fed is saying they will do is what resulted in a large number of Bogleheads getting nuked by buying long term treasuries at negative real rates, because of an unreasonable fear of "reinvestment risk".
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Mountain Doc »

AndyAndTheTuna wrote: Fri Dec 09, 2022 1:54 pm
km91 wrote: Fri Dec 09, 2022 1:49 pm
AndyAndTheTuna wrote: Fri Dec 09, 2022 1:09 pm A strategy of riding the yield curve upwards in the current environment is a totally fair one. This isn't "market timing", short term rates are largely driven by a small group of humans that are telling you what they plan to do.
It's exactly market timing. If OP's investment horizon is any longer than six months, the decision to buy a 6mo bill is an explicit bet that rates either rise further or fall more slowly than the market is pricing in. Does OP know more about the FOMC's future decisions than the market as a whole does?
Strongly disagree. The aversion towards actually looking at the interest rate environment and what the Fed is saying they will do is what resulted in a large number of Bogleheads getting nuked by buying long term treasuries at negative real rates, because of an unreasonable fear of "reinvestment risk".
Predicting what the Federal Funds Rate will do over the next few months is completely different than predicting what marketable bond rates will do over the next few months.

https://www.marketwatch.com/story/yes-1 ... 2014-10-21
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

AndyAndTheTuna wrote: Fri Dec 09, 2022 1:54 pm Strongly disagree. The aversion towards actually looking at the interest rate environment and what the Fed is saying they will do is what resulted in a large number of Bogleheads getting nuked by buying long term treasuries at negative real rates, because of an unreasonable fear of "reinvestment risk".
I am not averse at looking at the interest rate environment. I am looking at the current yield curve and see that implied forward rates are lower than today's rates. Unless you have knowledge of the Fed's future actions that the market does not have, I am not sure why you would expect to price the yield curve better than the market already has
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

km91 wrote: Fri Dec 09, 2022 2:05 pm
AndyAndTheTuna wrote: Fri Dec 09, 2022 1:54 pm Strongly disagree. The aversion towards actually looking at the interest rate environment and what the Fed is saying they will do is what resulted in a large number of Bogleheads getting nuked by buying long term treasuries at negative real rates, because of an unreasonable fear of "reinvestment risk".
I am not averse at looking at the interest rate environment. I am looking at the current yield curve and see that implied forward rates are lower than today's rates. Unless you have knowledge of the Fed's future actions that the market does not have, I am not sure why you would expect to price the yield curve better than the market already has
I count cashlike investments and long-term bonds as two separate investment allocations due to the actual earning mechanics and their risks. Which one is safer (hedges more risk) depends on the expense structure; nevertheless, risk may be taken by the mismatch. It is not as much of a guessing game as to which risks are acceptable and how much risk is actually wanted.

Holding cashlike investments for the long-term is not market timing, it is the investment to profit from the floating rates. Whether it is any good is debatable.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

secondopinion wrote: Fri Dec 09, 2022 3:45 pm I count cashlike investments and long-term bonds as two separate investment allocations due to the actual earning mechanics and their risks. Which one is safer (hedges more risk) depends on the expense structure; nevertheless, risk may be taken by the mismatch. It is not as much of a guessing game as to which risks are acceptable and how much risk is actually wanted.

Holding cashlike investments for the long-term is not market timing, it is the investment to profit from the floating rates. Whether it is any good is debatable.
OP is specifically asking if they should partially or fully rebalance out of BND in favor of 6mo bills. OP might have a need for cashlike assets, but I don't see that mentioned here. Their expressed motive for the potential change is the higher yield that can currently be had in tbills. This is market timing, and not particularly good timing since the yield curve is telling us the market expects short rates to fall in the near future
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

km91 wrote: Fri Dec 09, 2022 4:32 pm
secondopinion wrote: Fri Dec 09, 2022 3:45 pm I count cashlike investments and long-term bonds as two separate investment allocations due to the actual earning mechanics and their risks. Which one is safer (hedges more risk) depends on the expense structure; nevertheless, risk may be taken by the mismatch. It is not as much of a guessing game as to which risks are acceptable and how much risk is actually wanted.

Holding cashlike investments for the long-term is not market timing, it is the investment to profit from the floating rates. Whether it is any good is debatable.
OP is specifically asking if they should partially or fully rebalance out of BND in favor of 6mo bills. OP might have a need for cashlike assets, but I don't see that mentioned here. Their expressed motive for the potential change is the higher yield that can currently be had in tbills. This is market timing, and not particularly good timing since the yield curve is telling us the market expects short rates to fall in the near future
One is taking risk against the odds that rates stay relatively elevated on average long-term; it is a risky speculation that could take some time to pan out whether it is correct or not. The act of market timing is not my concern; lack of understanding the risks of doing so is my concern.

But I agree it is probably not a good idea.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by jdamo »

Thank you all for your comments and discussion. I sincerely appreciate them.

I don't think it is market timing but just being realistic.

I would just say that you have to be realistic and aware of the recent history....[Political comments removed by moderator Kendall.]Is the all knowing market just not willing to face recent events or are they shrugging their shoulders and saying I won't worry about it until next year and adjust further?

Anyway I think it is not "market timing" but just being aware of the current past events, status and having reasonable conclusions about what will likely happen. [Political comments removed by moderator Kendall.] So it is reasonable to think "riding the curve up" might yield superior returns vs the total bond index.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

jdamo wrote: Fri Dec 09, 2022 9:11 pm
[Political comments removed by moderator Kendall.]
I do not think it is reasonable to link the causes of inflation to a single variable, government spending, and to use it as the basis for making predictions about future investment returns.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

jdamo wrote: Fri Dec 09, 2022 9:11 pm Thank you all for your comments and discussion. I sincerely appreciate them.

I don't think it is market timing but just being realistic.

I would just say that you have to be realistic and aware of the recent history....[Political comments removed by moderator Kendall.] Is the all knowing market just not willing to face recent events or are they shrugging their shoulders and saying I won't worry about it until next year and adjust further?

Anyway I think it is not "market timing" but just being aware of the current past events, status and having reasonable conclusions about what will likely happen. [Political comments removed by moderator Kendall.] So it is reasonable to think "riding the curve up" might yield superior returns vs the total bond index.
There are experts in the market; they are certainly accepting facts. There are periods of higher inflation, and periods of disinflation and even deflation. The market is expecting a recoil back to reasonable inflation or even lower, possibly a mild recession.

Please do not get too caught up in politics; if you want to speculate on rates, you got to tune out the noise and voices. One does not have to follow the total bond market, but then they only will receive from what they invested in.

Personally, I will see whether my long-term bond purchases in October will pay off. If I am correct, I will be locking in considerable long-term capital gains.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by jdamo »

secondopinion wrote: Sat Dec 10, 2022 5:38 pm
jdamo wrote: Fri Dec 09, 2022 9:11 pm Thank you all for your comments and discussion. I sincerely appreciate them.

I don't think it is market timing but just being realistic.

[Political comments removed by moderator Kendall.] Is the all knowing market just not willing to face recent events or are they shrugging their shoulders and saying I won't worry about it until next year and adjust further?

Anyway I think it is not "market timing" but just being aware of the current past events, status and having reasonable conclusions about what will likely happen. [Political comments removed by moderator Kendall.] So it is reasonable to think "riding the curve up" might yield superior returns vs the total bond index.
There are experts in the market; they are certainly accepting facts. There are periods of higher inflation, and periods of disinflation and even deflation. The market is expecting a recoil back to reasonable inflation or even lower, possibly a mild recession.

Please do not get too caught up in politics; if you want to speculate on rates, you got to tune out the noise and voices. One does not have to follow the total bond market, but then they only will receive from what they invested in.

Personally, I will see whether my long-term bond purchases in October will pay off. If I am correct, I will be locking in considerable long-term capital gains.
How long a long-term bond purchase did you do? Do you mean 30 yr Treasury?
Or just a longer term bond?
How does that compare to the average duration of the Vanguard Total Bond Index which last I checked was a little over 6 years?
Am I missing a good opportunity?
Thanks.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

jdamo wrote: Sun Dec 11, 2022 1:47 pm
secondopinion wrote: Sat Dec 10, 2022 5:38 pm
jdamo wrote: Fri Dec 09, 2022 9:11 pm Thank you all for your comments and discussion. I sincerely appreciate them.

I don't think it is market timing but just being realistic.

[Political comments removed by moderator Kendall.] Is the all knowing market just not willing to face recent events or are they shrugging their shoulders and saying I won't worry about it until next year and adjust further?

Anyway I think it is not "market timing" but just being aware of the current past events, status and having reasonable conclusions about what will likely happen. [Political comments removed by moderator Kendall.] So it is reasonable to think "riding the curve up" might yield superior returns vs the total bond index.
There are experts in the market; they are certainly accepting facts. There are periods of higher inflation, and periods of disinflation and even deflation. The market is expecting a recoil back to reasonable inflation or even lower, possibly a mild recession.

Please do not get too caught up in politics; if you want to speculate on rates, you got to tune out the noise and voices. One does not have to follow the total bond market, but then they only will receive from what they invested in.

Personally, I will see whether my long-term bond purchases in October will pay off. If I am correct, I will be locking in considerable long-term capital gains.
How long a long-term bond purchase did you do? Do you mean 30 yr Treasury?
Or just a longer term bond?
How does that compare to the average duration of the Vanguard Total Bond Index which last I checked was a little over 6 years?
Am I missing a good opportunity?
Thanks.
Your posted plan and my speculation are directly opposite in view of rates. Very likely, one of them will be wrong. If you are nervous about rates going up, then what I am doing is definitely going to make you panic.

Posting about treasury bills being a good idea over total bond is speculative. The fact you are curious about missing “a good opportunity” opposing your own opinions means either you have not thought through your speculation enough or your conviction is weak. Either way, you should stay with Total Bond, which is like a bit of both ideas.

I bought VGLT as a partially speculative buy in October (Vanguard Long-Term Treasury ETF). The average effective maturity is about 23.3 years and the average duration is about 16 years. It is more than twice as volatile as Total Bond. I bought other long-term bonds over the past few months.

But it should mean nothing what I buy in all honesty; it is either appropriate for you or it is not. My guess is it is not.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by jdamo »

secondopinion wrote: Sun Dec 11, 2022 2:52 pm
jdamo wrote: Sun Dec 11, 2022 1:47 pm
secondopinion wrote: Sat Dec 10, 2022 5:38 pm
jdamo wrote: Fri Dec 09, 2022 9:11 pm Thank you all for your comments and discussion. I sincerely appreciate them.

I don't think it is market timing but just being realistic.

I would just say that you have to be realistic and aware of the recent history....[Political comments removed by moderator Kendall.] Is the all knowing market just not willing to face recent events or are they shrugging their shoulders and saying I won't worry about it until next year and adjust further?

Anyway I think it is not "market timing" but just being aware of the current past events, status and having reasonable conclusions about what will likely happen. [Political comments removed by moderator Kendall.] So it is reasonable to think "riding the curve up" might yield superior returns vs the total bond index.
There are experts in the market; they are certainly accepting facts. There are periods of higher inflation, and periods of disinflation and even deflation. The market is expecting a recoil back to reasonable inflation or even lower, possibly a mild recession.

Please do not get too caught up in politics; if you want to speculate on rates, you got to tune out the noise and voices. One does not have to follow the total bond market, but then they only will receive from what they invested in.

Personally, I will see whether my long-term bond purchases in October will pay off. If I am correct, I will be locking in considerable long-term capital gains.
How long a long-term bond purchase did you do? Do you mean 30 yr Treasury?
Or just a longer term bond?
How does that compare to the average duration of the Vanguard Total Bond Index which last I checked was a little over 6 years?
Am I missing a good opportunity?
Thanks.
Your posted plan and my speculation are directly opposite in view of rates. Very likely, one of them will be wrong. If you are nervous about rates going up, then what I am doing is definitely going to make you panic.

Posting about treasury bills being a good idea over total bond is speculative. The fact you are curious about missing “a good opportunity” opposing your own opinions means either you have not thought through your speculation enough or your conviction is weak. Either way, you should stay with Total Bond, which is like a bit of both ideas.

I bought VGLT as a partially speculative buy in October (Vanguard Long-Term Treasury ETF). The average effective maturity is about 23.3 years and the average duration is about 16 years. It is more than twice as volatile as Total Bond. I bought other long-term bonds over the past few months.

But it should mean nothing what I buy in all honesty; it is either appropriate for you or it is not. My guess is it is not.
Thanks for the reply and you make good points.
I do feel rates are going up more and for longer. I don't know this for sure of course but think it is very likely.
But I probably need to stay with the Total Bond Index to let it re-adjust to the new rate environment and tune out.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Northern Flicker »

Bond indices usually don't incorporate bonds all the way to maturity. VBTLX will behave like a bond ladder, but bonds will be sold when they are close enough to maturity to fall out of the index. I think that is 1 year from maturity for total bond.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by OverseasBH »

vineviz wrote: Fri Dec 09, 2022 1:12 pm
jdamo wrote: Fri Dec 09, 2022 12:29 pm I'm trying to weigh staying with VBTLX vs say taking some % and buying 6 month Treasuries that are yielding ~4.5% now and likely to rise as the FED continues to raise rates into next year, and re-buying them as the curve goes up and stabilizes.
Market timing bonds is like shooting yourself in the foot with a BB gun.

It might not hurt a lot, but's not even a LITTLE bit of a smart decision.
Can you expand a bit on what you mean by it not being a good decision?

For example, leading fixed income posters here, including Bill Bernstein and Kevin M, are rushing to buy long-term TiPS ladders, now that coupon rates are positive and inflation is up. I just early withdrew my long-term CD for one with a higher coupon rate that will payback the penalty in a short time.

These are clearly market timing transactions but both seem to pass muster here as not being market timing. These seem like smart decisions. Can you please expound both on what you consider market timing in the fixed income space specifically and why you believe it is not a smart decision. Thanks.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by alluringreality »

jdamo wrote: Fri Dec 09, 2022 12:29 pm I have a Vanguard Total Bond Index Fund (VBTLX)question- does it act like a bond ladder?
There is a Wiki entry on the general topic.
https://www.bogleheads.org/wiki/Individ ... _bond_fund
I'm trying to weigh staying with VBTLX vs say taking some % and buying 6 month Treasuries that are yielding ~4.5% now and likely to rise as the FED continues to raise rates into next year, and re-buying them as the curve goes up and stabilizes.
As a savings bond buyer, personally I tend to consider it easier to have considered adopting this sort of plan one year ago. Basically I had more disagreement with the bond market at that time, when savings bonds offered above-market rates without price risk. I didn't consider there being much benefit to encourage choosing market duration across late 2019-2021. Since the entire yield curve is cheaper today, I'm personally more inclined to consider market duration today than the past few years. Although I'm no better at predicting future trends today, so I'll probably just continue with much of my own initial choices.

The total bond market includes a considerable portion of treasuries. If someone is absolutely convinced that future month over month inflation is bound to end up higher than the breakeven rate, TIPS might be one consideration. Essentially that amounts to predicting unexpected inflation, so again it's difficult to actually recommend. My own guesses about the future simply end up wrong too often for me to invest that way. Anyway, TIPS do not necessarily pay off in the same scenario as total bond, so it's somewhat difficult to recommend if someone has previously chosen to invest in total bond.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by alluringreality »

OverseasBH wrote: Mon Dec 12, 2022 5:43 am These are clearly market timing transactions but both seem to pass muster here as not being market timing.
In terms of practical usage, the definition of market timing may depend on an individual's personal plan. For example if someone was following the buy and hold focused strategy presented by William Sharpe in the following link, an investor would not necessarily need to buy and sell as market prices change. To such an investor, the personal definition of market timing may tend to differ from common usage. Typically-recommended contrarian strategy plans on buying and selling when relative market prices change, or rebalancing to a constant asset allocation, and investing that way is commonly labeled as avoiding market timing. There are practical reasons why everyone can not follow such a plan, and individuals may not necessarily want to invest that way. Liability matching might be another example of a personal strategy where a bond investor may choose to avoid using assets to buy and sell stocks depending on current price.
https://web.stanford.edu/~wfsharpe/aaap/wfsaaap.pdf
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

OverseasBH wrote: Mon Dec 12, 2022 5:43 am These are clearly market timing transactions but both seem to pass muster here as not being market timing. These seem like smart decisions. Can you please expound both on what you consider market timing in the fixed income space specifically and why you believe it is not a smart decision. Thanks.
It becomes market timing when the investor mismatches the duration of their bonds and the duration of their future spending liability. If the investor has a 30 year investment horizon they can buy a 30yr bond and not have to think about interest rates or the yield curve until the bond matures. When the investor holds bonds with a shorter duration than their investment horizon they are making a bet that they can roll shorter duration bonds at higher future rates than are implied by the 30yr Treasury
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

km91 wrote: Mon Dec 12, 2022 10:46 am
OverseasBH wrote: Mon Dec 12, 2022 5:43 am These are clearly market timing transactions but both seem to pass muster here as not being market timing. These seem like smart decisions. Can you please expound both on what you consider market timing in the fixed income space specifically and why you believe it is not a smart decision. Thanks.
It becomes market timing when the investor mismatches the duration of their bonds and the duration of their future spending liability. If the investor has a 30 year investment horizon they can buy a 30yr bond and not have to think about interest rates or the yield curve until the bond matures. When the investor holds bonds with a shorter duration than their investment horizon they are making a bet that they can roll shorter duration bonds at higher future rates than are implied by the 30yr Treasury
Right, but most of us do not know that exactly 30 years into the future we will need X dollars. Since many people could be hit earlier with expenses rather than later, the mismatch is not always a bad thing for them. So, there is often a good argument staying shorter on the duration, at least on some of the portfolio.

If one subscribes to the line of thought that there is a "term premium" on the other hand, then some people may choose to invest in longer-term bonds than matching would state.

If I was duration matching, I would be participating in 30 year bond auctions at this point. But the speculator in me assesses that bonds in the 20-25 year range are probably the better deal overall. But each can come to their own conclusions.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

secondopinion wrote: Mon Dec 12, 2022 11:31 am Right, but most of us do not know that exactly 30 years into the future we will need X dollars. Since many people could be hit earlier with expenses rather than later, the mismatch is not always a bad thing for them. So, there is often a good argument staying shorter on the duration, at least on some of the portfolio.
We want our bond duration to approximate our investment horizon in aggregate. Within that we are able to construct a cashflow structure that also meets our spending requirements. A barbell structure with a small portion of our fixed income in bills to meet expected or unexpected short term liquidity needs, and the rest in longer duration bonds will still more or less approximate our duration requirement while giving us the short term cashflow we need
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

km91 wrote: Mon Dec 12, 2022 12:06 pm
secondopinion wrote: Mon Dec 12, 2022 11:31 am Right, but most of us do not know that exactly 30 years into the future we will need X dollars. Since many people could be hit earlier with expenses rather than later, the mismatch is not always a bad thing for them. So, there is often a good argument staying shorter on the duration, at least on some of the portfolio.
We want our bond duration to approximate our investment horizon in aggregate. Within that we are able to construct a cashflow structure that also meets our spending requirements. A barbell structure with a small portion of our fixed income in bills to meet expected or unexpected short term liquidity needs, and the rest in longer duration bonds will still more or less approximate our duration requirement while giving us the short term cashflow we need
That is correct. This is probably the best matching solution. Some choose to do shorter durations for all holding and do all intermediate bonds, for example. Volatility-wise, it is the same. The bond convexity is lower, making it a tad riskier on the downside, however. But maybe it gets better yields? Who knows at the end of the day.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Bud »

jdamo wrote: Fri Dec 09, 2022 12:29 pm I have a Vanguard Total Bond Index Fund (VBTLX)question- does it act like a bond ladder?

Since VBTLX has a 69% turnover every year and a average duration of 6.41 years, does it act like a bond ladder in a way as the interest rates rise and therefore cut the bond fund's losses we have experienced lately as the fund manager buys new bonds every year? (I can't seem to find the total bond index range of duration, just the average....) Is it a lazy person's bond ladder in a way?

I'm trying to weigh staying with VBTLX vs say taking some % and buying 6 month Treasuries that are yielding ~4.5% now and likely to rise as the FED continues to raise rates into next year, and re-buying them as the curve goes up and stabilizes.
No, it does not act as a bond ladder, the function of the VBTLX and a bond ladder are different. The reason why is VBTLX does not (always) buy and hold bonds until their duration. The mutual fund will buy and sell bonds to align with the index it follows. This means that if money is moving into the bond market changing the overall duration of the market, VBTLX will buy or sell to approximate accordingly. At a macro (and practical) level, those moves probably do not amount to much for the individual investor. In real terms, a bond ladder provides you more control of your duration and yield to maturity.

For many investors, as you noted, VBTLX will serve fine instead of building a bond ladder.

All the best.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

secondopinion wrote: Mon Dec 12, 2022 12:44 pm But maybe it gets better yields? Who knows at the end of the day.
Why would the intermediate portion of the curve get "better yields" than the long end?
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Northern Flicker »

Another difference from a bond ladder is that interest payments will be reinvested in a more efficient and timely manner in a bond fund.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

km91 wrote: Mon Dec 12, 2022 1:04 pm
secondopinion wrote: Mon Dec 12, 2022 12:44 pm But maybe it gets better yields? Who knows at the end of the day.
Why would the intermediate portion of the curve get "better yields" than the long end?
Bond convexity is good for bonds; it reduces the loss on a rate drop and increases the gain on a rate increase, versus what the duration would normally suggest. As such, this would mean that the yield obtained would need to be lower than if the bond convexity did not exist.

The composite convexity of a bond barbell is higher than holding intermediate bonds, given equaling durations compositely. Therefore, the risk to rate changes would, in naive theory, be higher for the intermediate bonds than the barbell. Under this naive theory, the yield for the barbell should be lower slightly since there is more safety to rate changes.

Now, the yield curve is not always normal nor do rates add up for the comparison. When the convexity is being "rewarded" using the barbell construct, it is a sign of risk that is not being accounted for. That is because the risk of the current yield of the barbell is high; it could be that the short end of the barbell could cut out some yield considerably (returning it to a more normal state) and/or the long end of the barbell has more expected volatility than what the duration and convexity suggest.

It is a tricky matter.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by idoc2020 »

vineviz wrote: Fri Dec 09, 2022 1:12 pm
jdamo wrote: Fri Dec 09, 2022 12:29 pm I'm trying to weigh staying with VBTLX vs say taking some % and buying 6 month Treasuries that are yielding ~4.5% now and likely to rise as the FED continues to raise rates into next year, and re-buying them as the curve goes up and stabilizes.
Market timing bonds is like shooting yourself in the foot with a BB gun.

It might not hurt a lot, but's not even a LITTLE bit of a smart decision.
Would like to disagree with this. I'm participating in another thread on this forum where a fairly young investor in 2020 decided to buy EVD (a 30 year duration ETF) because he felt that his longevity warranted such a move. He bought it when interest rates were very low and government spending and other inflationary factors were trending high. In my opinion, that is a perfect example of not having timed the market. Of course, we all know that it's impossible to predict inflation or where rates are going, but it would have been FAR more likely for rates to go significantly up than significantly down. He is down 65% so far on this investment! Yes, I imagine that if he keeps holding it for the full length of its duration ie: 2045 he will probably do just fine. That is a definite instance when I would have market timed my new bond money and gone into a shorter duration regardless of my "horizon".

By the way, a related thought: If funds such as BND can be seen as quasi ladders is it reasonable to assume that BND is now down in NAV because it contains many bonds whose low yields are being replaced with higher yielding bonds. By definition, rising yields occur when people are no longer willing to purchase those older and lower coupon rates for the same price. Therefore, there must be a built in lag that occurs when the change in rates is very rapid from a very low rate environment to an inflationary one. This would imply to me that BND is "catching up" and it may be a good time to purchase more of it. The issue is relevant because today we have lots of other bond options ie: ibonds, TIPS, T-bills that are all much more tempting than they used to be. It's been depressing watching BND fall but I'm wondering if it's a bit like a coiled spring mechanism waiting to shoot up as the older bonds unwind into newer ones and as inflation stabilizes over time.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

secondopinion wrote: Mon Dec 12, 2022 3:13 pm That is because the risk of the current yield of the barbell is high; it could be that the short end of the barbell could cut out some yield considerably (returning it to a more normal state) and/or the long end of the barbell has more expected volatility than what the duration and convexity suggest.

It is a tricky matter.
In this particular case the market is saying it perceives short rates as riskier than long term rates. The 6mo is yielding 100bps over the 30yr today because it is riskier. In either case, I think for most investors holding a barbell the rate risk on the short end is immaterial. They have a need for cash liquidity and are going to hold bills irrespective of short term rates
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

idoc2020 wrote: Mon Dec 12, 2022 4:31 pm
vineviz wrote: Fri Dec 09, 2022 1:12 pm
jdamo wrote: Fri Dec 09, 2022 12:29 pm I'm trying to weigh staying with VBTLX vs say taking some % and buying 6 month Treasuries that are yielding ~4.5% now and likely to rise as the FED continues to raise rates into next year, and re-buying them as the curve goes up and stabilizes.
Market timing bonds is like shooting yourself in the foot with a BB gun.

It might not hurt a lot, but's not even a LITTLE bit of a smart decision.
Would like to disagree with this. I'm participating in another thread on this forum where a fairly young investor in 2020 decided to buy EVD (a 30 year duration ETF) because he felt that his longevity warranted such a move. He bought it when interest rates were extremely low and when government spending was extremely high. In my opinion, that is a perfect example of not having timed the market. Of course, we all know that it's impossible to predict inflation or where rates are going, but it would have been FAR more likely for rates to go significantly up than significantly down. He is down 65% so far on this investment! Yes, I imagine that if he keeps holding it for the full length of its duration ie: 2045 he will probably do just fine. That is a definite instance when I would have market timed my new bond money and gone into a shorter duration regardless of my "horizon".
Major bonds mismatches to expenses can be highly destructive. Aside from that, what can really be said? Risk and return profile need to be respected if the duration is not going to be matched.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

idoc2020 wrote: Mon Dec 12, 2022 4:31 pm Of course, we all know that it's impossible to predict inflation or where rates are going, but it would have been FAR more likely for rates to go significantly up than significantly down.
Said everyone that's ever made a rate prediction in the last 40 years
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

km91 wrote: Mon Dec 12, 2022 4:47 pm
secondopinion wrote: Mon Dec 12, 2022 3:13 pm That is because the risk of the current yield of the barbell is high; it could be that the short end of the barbell could cut out some yield considerably (returning it to a more normal state) and/or the long end of the barbell has more expected volatility than what the duration and convexity suggest.

It is a tricky matter.
In this particular case the market is saying it perceives short rates as riskier than long term rates. The 6mo is yielding 100bps over the 30yr today because it is riskier. In either case, I think for most investors holding a barbell the rate risk on the short end is immaterial. They have a need for cash liquidity and are going to hold bills irrespective of short term rates
Yes, barbell investors hold the short end for liquidity; but they can reinvest in the long-term bonds if they want.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

secondopinion wrote: Mon Dec 12, 2022 4:57 pm Yes, barbell investors hold the short end for liquidity; but they can reinvest in the long-term bonds if they want.
I'm not sure where this is going. My point remains that you should duration match bonds, structure for cashflow if you need to, and that most decisions to mismatch duration at the portfolio level are akin to market timing and the investor thinking they are better at pricing the yield curve than the market
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Northern Flicker »

If you want an intermediate duration, treasury barbells have been less efficient portfolios than intermediate treasuries the last 10-12 years:

https://www.portfoliovisualizer.com/bac ... tion3_2=70
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

Northern Flicker wrote: Mon Dec 12, 2022 5:55 pm If you want an intermediate duration, treasury barbells have been less efficient portfolios than intermediate treasuries the last 10-12 years:
Intuitively this is what we should expect when the yield curve is upward sloping. We are giving up some exposure to term in favor of a preference for liquidity
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

km91 wrote: Mon Dec 12, 2022 5:27 pm
secondopinion wrote: Mon Dec 12, 2022 4:57 pm Yes, barbell investors hold the short end for liquidity; but they can reinvest in the long-term bonds if they want.
I'm not sure where this is going. My point remains that you should duration match bonds, structure for cashflow if you need to, and that most decisions to mismatch duration at the portfolio level are akin to market timing and the investor thinking they are better at pricing the yield curve than the market
Maybe Person A might not care about needing money until year 30, but they still might care that they only got one datapoint in the market to obtain whatever returns they will receive.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Northern Flicker »

km91 wrote: Mon Dec 12, 2022 6:04 pm
Northern Flicker wrote: Mon Dec 12, 2022 5:55 pm If you want an intermediate duration, treasury barbells have been less efficient portfolios than intermediate treasuries the last 10-12 years:
Intuitively this is what we should expect when the yield curve is upward sloping. We are giving up some exposure to term in favor of a preference for liquidity
The greater efficiency of an intermediate portfolio vs a barbell has been true for duration-matched portfolios, which have the same term exposure. I attempted to match durations in my backtest, but the duration of VGLT has been shortening some due to the re-issuance of the 20-year bond, so it is unclear what duration to use for VGLT in the backtest.

I generally think that inflation risk is under-compensated with long-term treasuries because many investors in them are matching to long-term nominal liabilities and thus are not taking inflation risk. This would explain the under-performance of a duration-matched barbell in any case.
Last edited by Northern Flicker on Mon Dec 12, 2022 7:58 pm, edited 2 times in total.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

secondopinion wrote: Mon Dec 12, 2022 6:11 pm Maybe Person A might not care about needing money until year 30, but they still might care that they only got one datapoint in the market to obtain whatever returns they will receive.
The fact that the yield curve offers the investor a choice of returns across different maturities is a red herring. If you have a long duration liability you should hedge it with long duration assets like long-term bonds and equities. A long term saver will purchase these assets at whatever the prevailing market price is. Having many durations of fixed income to choose from is a false choice. If the investor is making regular contributions they will have many datapoints in the market.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Parkinglotracer »

It does not act like a bond ladder in the aspect that no portion matures so you can spend it at original investment coupon / face value if interest rates increase.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

km91 wrote: Mon Dec 12, 2022 6:44 pm
secondopinion wrote: Mon Dec 12, 2022 6:11 pm Maybe Person A might not care about needing money until year 30, but they still might care that they only got one datapoint in the market to obtain whatever returns they will receive.
The fact that the yield curve offers the investor a choice of returns across different maturities is a red herring. If you have a long duration liability you should hedge it with long duration assets like long-term bonds and equities. A long term saver will purchase these assets at whatever the prevailing market price is. Having many durations of fixed income to choose from is a false choice. If the investor is making regular contributions they will have many datapoints in the market.
Most investors are not buying long-term bond to hedge an expense directly; they are seeking an investment not tied to stocks as much for a source of returns.

The principle of DCA is often discarded for buying stocks funds because the impacts of poor timing are often outweighed by a sizable risk premium. In the case of long-term bonds, the possible premium is smaller but the volatility is still high. The cost to wait to obtain a closer to average return is much less than it is for stocks, and trying to lump sum the investment can differ greatly from the average returns.

We have no idea what that average is. But if a position in long-term bonds as a diversifier is to be had, it would be best served if we get that average.

As a hedge, just buy it as you need it.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Rajsx »

I admit I do not understand much about Bonds although I have long been invested in BND following Bogleheads 3 fund portfolio.

Now the BND in our IRAs has lost around 14% for the year, which I lock the loss the minute I sell & move to even a Money Market Fund & think where else to invest. The BND has never lost this much in its history.

We are in mid sixties, retired, presently use dividends & VTI in taxable for our living expenses. We do sell BND at a loss when we do Roth conversion & buy VTI in our Roths.

We hopefully can wait for 6-8 yrs, the BND’s duration before liquidating for our living expenses.

I can understand the loss in VTSAX/VTI, been through 2008 , I know it will come around as I believe in America, but a 14% loss in BND is difficult for me to understand & halting the interest rate hikes is nowhere in sight.

Just my thoughts………. any ideas what I could do to better my situation, thanks
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

secondopinion wrote: Mon Dec 12, 2022 7:55 pm The principle of DCA is often discarded for buying stocks funds because the impacts of poor timing are often outweighed by a sizable risk premium. In the case of long-term bonds, the possible premium is smaller but the volatility is still high. The cost to wait to obtain a closer to average return is much less than it is for stocks, and trying to lump sum the investment can differ greatly from the average returns.
Poor timing for stocks implies a low expected risk premium. If we are expecting a sizable risk premium when we purchase stocks that is certainly good timing. In any case, if you were an investor at any point in the last 40 years waiting to purchase long term bonds until yields were closer to the "average" you would've never bought any long term bonds. I'm not sure why DCA is insufficient to deliver the "average" over a long enough investment time horizon, but an investor trading up and down the yield curve in search of "better yield" can
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by idoc2020 »

km91 wrote: Mon Dec 12, 2022 4:51 pm
idoc2020 wrote: Mon Dec 12, 2022 4:31 pm Of course, we all know that it's impossible to predict inflation or where rates are going, but it would have been FAR more likely for rates to go significantly up than significantly down.
Said everyone that's ever made a rate prediction in the last 40 years
When rates are at 1.25% you are 1.25 points away from zero and 16 points away from what we had in the 70’s and 80’s. The best case scenario for him was rates drop by 1%. The worst case is that rates rise by 5~7%. Even if we can’t predict the future we can predict the penalty for being wrong. There were people in that discussion that warned him if rates go up by only 2% his fund loses 50%. Yes, you should market time your bond exposure.
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

idoc2020 wrote: Mon Dec 12, 2022 9:04 pm The best case scenario for him was rates drop by 1%. The worst case is that rates rise by 5~7%
0% yield is a best case scenario? Earning 5-8% risk free on your money is a worst case?
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Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by alluringreality »

Rajsx wrote: Mon Dec 12, 2022 7:58 pm Now the BND in our IRAs has lost around 14% for the year, which I lock the loss the minute I sell & move to even a Money Market Fund & think where else to invest. The BND has never lost this much in its history.
As noted, if someone moves short into a something like a deflationary recession losses may end up locked in, while staying invested retains the original intention. TIPS could be useful for some considerations or scenarios, but likewise switching to TIPS might end up counterproductive with a deflationary recession. One potentially less disruptive option might be splitting into bonds that mature, but BND holds a lot of various positions that makes a similar investment potentially fairly complicated, so I doubt many BND buyers change their entire investment. Some people have indicated that they simply sell one or more years of BND to buy less complex bonds that will mature for future use, and generally with some assumptions being made, if they match the duration then the change may be fairly limited. Individual bonds, or funds such as BulletShares or iShares iBonds, are examples of what individuals might buy if they wanted their bonds to eventually mature. Of course these are more complicated directions than I expect may be the typical route, and I'm sure many people will simply continue holding the bond fund, which can rise or fall in price with the market.
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