How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

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Randle2Hard2Handle
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How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Randle2Hard2Handle »

Edited to include 2 yield curves: one before the FOMC meeting and one as of Tuesday-end (Oct. 22). You will not believe what I underwent to upload these charts.

We are seeing an unprecedented steepening of the Treasury yield curve especially from the medium (3 years onward) to the the long-end (the 30-year mark). The long-end portion is gonna be heavily affected by the yield curve that is steepening. Steepening here means the interest rate (IR) is going up. When the IR goes up, the present value factor of the IR decreases, especially for the interest payments and principals that are pending and due furthest out. A 20-year US Treasury Bond that makes interest payments semiannually for 20 years and the principal 20 years out, is gonna be heavily discounted when the 20Y bond interest rate goes up from 4.0% on the FOMC meeting day (Sept. 18) to 4.55% yesterday. Check out the yield curve change from Sept. 18 (blue) to Oct. 22 (red), yesterday. The intersection at the 6-month mark shows that the interest rates (red) are higher from that point on, thus lowering the values of your Bond ETFs. Yet the YC is threatening to steepen even further and when that happens, we could go near 5% or beyond and our bond funds could be crushed. So what should we do?

Image

There are three options:

Option 1. Stick to the shortest portion of the Treasury yield curve for your taxable accounts (you want to avoid state taxes): i.e., (a) 0-3 Months US Treasury Bill ETFs: SGOV / BIL. Or (b) US Floating Rate Note (FRN) ETFs: USFR / TFLO. Or something like (c) 0-12 Months US Treasury Bill ETFs: SHV / BILS / TBLL. (a) and (b) are the best options and you can avoid having your price impacted by the steepening yield curve. At that short end of the YC, there is no steepening -- i.e., the IR is not going higher -- and the YC is still inverted.

Option 2. For your non-taxable accounts, focus on Corporate Floating Rate Note (FRN) ETFs: FLOT/ FLRN / FLTR / VRIG. Or I would go into a very short 1-5Y corporate bond ETF like PULS, which is frontloaded and has an effective duration of 0.21 or only 2.5 months. Even at 0.5 or at 6 months, the IR increased from 4.45 to 4.47%, even though the impact on the bond price would be pretty negligible.

Option 3. Just buy 3-month (or any length) US Treasury Bills from your broker and hold them to maturity. Easier to hold onto the shortest maturity US Treasury and the highest-yielding US Treasury happens to be the 3-month US T-Bills, despite the steepening that's occurring from the 3 year to the 30-year mark.
Last edited by Randle2Hard2Handle on Wed Oct 23, 2024 8:25 pm, edited 11 times in total.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Tom_T »

"Unprecedented" steepening? Many people here have seen this movie before. ;)

It seems like you know exactly what is going to happen with interest rates across the yield curve. What do you know that the bond market doesn't know and has already priced in?
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by jebmke »

I maintain a duration for fixed income that is consistent with my overall portfolio goals. I tend to view duration in total rather than isolate fixed income. Changes are rare and not in response to market outlooks or yield curve movement.

One exception was a long position in Tips I took in October 2008.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by oldcomputerguy »

This topic is now in the Investing - Theory, News & General forum.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by N.Y.Cab »

I’m staying with individual short term Treasury from secondary market. No need to venture out beyond 3 months at present for the best yields.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by 1moreyr »

I am retired and doing liability matching with a mix T bills and I bonds out the next 5 years. I have a VBTLX for a duration at 6.5 years. the bond fund is about 10% of total portfolio - total fixed is 40%. I have kept bond funds a lower percentage after my learnings in early 2022.

This all carries me out 10X expenses on fixed and that's the best I can come up with. I do have a little in 10 year tbills that i am questioning why I bought it but the interest rate is 4.85%.

I do question what else I could do to optimize the bond funds but drawing a blank on if that's a good plan or not.
I have also watched the 10 year fluctuate from near zero to 5% in recent history and expect it will change again.
steepening was always expected as the curve has been inverted for quite a while. on the bright side money you hold longer will give you more interest.... just like the old days

I do share your concern and following for ideas
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Tramper Al »

If you know that interest rates will increase substantially over the near term, then the way to avoid losses in your (anything but short term) bond ETF is not to own one. I don't, so I do.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by dbr »

I think people that worry about bond funds and changing interest rates can best stop worrying by not owning bond funds.

A question is whether it is really better to not own such funds or better to own them and just stop worrying and accept funds for what they are.

Disclaimer: With 60 years of investing the last 25 or so have found my fixed income predominately invested in bond funds.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Dude2 »

The yield curve steepening at least means, hopefully, that the economy is working in a way that makes sense, e.g. that people willing to take on duration risk are compensated appropriately. Right?

Also, the instantaneous value of the fund's NAV is directly related to the fact that future yields are better. For a 7 year duration fund, for example, it says that, yes, your NAV dropped, but from here forward you will be receiving higher dividend payouts. Essentially when you buy that fund, you are signing up to be a customer for the next 7 years. The price to join the club changes as the benefits for club membership increase. Bottom line is that the price given is "fair" to club members -- applies to both existing members and new ones.

There should be an incentive for you belonging to long bond club versus those guys over there that are members of short bond club because you have additional risk. I think that Bogleheads are not trying to time interest rate movements, and we are supposed to be using the fund that corresponds to our need for the money. The other concept is having an uncorrelated pair of assets that benefit the portfolio as a whole. Got to pick a side on that one.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by rkhusky »

Put your money in a MM. Or buy CD’s or individual bonds.

I am not making any changes to my bond funds.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by nisiprius »

You can't avoid it. You should understand it as the intrinsic risk of buying a bond ETF, and decide whether you like the risk-return characteristic of this investment, just like any other investment

Compare your posting to this one:

Interest rates can only go up, why go intermediate in bonds?
I see the total bond fund and intermediate treasuries recommended a lot on here. I know people don't like to market time but interest rates are currently zero and whether rates rise in 2010 or 2011 or 2015, eventually they will rise and intermediate term bonds will get hit.

So isn't it wise to go short in this environment where rates can only go up?
That posting was made on July 19th, 2009. You can say the poster was right, because interest rates did go up eventually--but not for eight years!

Source: St. Louis Fed

Image

I don't know what that poster did, but if he switched to, say, short-term bonds (BSV), or Treasury bills (BIL), when interest rates finally did go up, they didn't go up enough to pay off. Look closely at the BND curve. During the first period of interest rate hikes, 2016-2019, BND didn't even lose money, it just stayed level. During the brutal rate hikes of 2022, yes, it did lose money, but was still ahead of short-term bonds or Treasury bills. And notice that in the two years since, it's made back roughly half the losses.

Source: testfol.io

Image

This is exactly the kind of behavior you expect from a bond ETF or fund with a six-year duration, like BND. The responses to interest rate changes are short-term responses, and if the interest rate levels out, the fund recovers... and it takes about six years.
Last edited by nisiprius on Wed Oct 23, 2024 7:32 am, edited 1 time in total.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by dbr »

Dude2 wrote: Wed Oct 23, 2024 7:06 am The yield curve steepening at least means, hopefully, that the economy is working in a way that makes sense, e.g. that people willing to take on duration risk are compensated appropriately. Right?

Yes. It is out of kilter to have a flat or inverted yield curve. But I don't know what the statistics are on how often that happens, for how long, or to what degree. Note a steepening yield curve does not necessarily mean longer term interest rates increasing. As or more likely it is short term rates dropping. So there is the average level of the yield curve and the slope of the yield curve with maturities. Larry Swedroe once suggested that it makes sense to go longer when you can gain 20bps in yield per year of additional maturity, not that I am encouraging changing around holdings.

Also, the instantaneous value of the fund's NAV is directly related to the fact that future yields are better. For a 7 year duration fund, for example, it says that, yes, your NAV dropped, but from here forward you will be receiving higher dividend payouts. Essentially when you buy that fund, you are signing up to be a customer for the next 7 years. The price to join the club changes as the benefits for club membership increase. Bottom line is that the price given is "fair" to club members -- applies to both existing members and new ones.

The NAV changes instantaneously with instant changes in yield. I would alter your statement to present not future yields. Yields are changing constantly and there is no information regarding future yields. It is true that when yields go up and NAVs go down that a holder of a bond fund will eventually be made whole and more by accumulating the higher dividends over time. That is so until yields go up or down some more, which happens everyday. You might better think of a bond fund as a machine to convert volatility in yields over time into volatility of bond fund return over time, in proportion to the duration held.

There should be an incentive for you belonging to long bond club versus those guys over there that are members of short bond club because you have additional risk. I think that Bogleheads are not trying to time interest rate movements, and we are supposed to be using the fund that corresponds to our need for the money. The other concept is having an uncorrelated pair of assets that benefit the portfolio as a whole. Got to pick a side on that one.

That is correct. The risk factors for bonds are credit risk and term risk which means in the big picture longer durations and more risk of default are rewarded by higher return.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Trance »

You forgot tips. They only rise and fall with the real yield. Essentially the risk component of inflation is removed.

The 10 year nominal government bond has had its yield, and so price, range from 1% to 15% in the 80s.

But the 10 year breakeven rate, which is what would set the 10 year tips yield if it was available back then, has only ranged from 1% to 3%. If inflation ever runs away like it did before, or could with war, etc., nominal bonds will rise and so prices will fall much harder as they compensate for inflation. But tips and their etfs won't have as much a distract change.

BND's (total nominal bond) average duration is 6 years and SCHP (total tips) is 6.8.

BND fell 12.65% the last 5 years due to rising rates. But SCHP only fell 6.84%

So it's possible to derisk your bonds by removing the inflation risk.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by nisiprius »

The next point that needs to be made, Randle2Hard2Handle, is that you don't know what the yield curve is going to do. You really don't. You really don't. When you think you are dodging a bullet, you might be dodging into it.

Just stop trying to predict interest rates; just design your investing strategy around the idea that you can't. There are three workable possibilities I know of:
  1. Knowing your own planned time frame for holding a bond investment, and choosing bond funds whose durations are shorter than that. If you are super-cautious, half that.
  2. Buying individual bonds and holding them to maturity.
  3. Using series I United State savings bonds to the greatest extent possible, since they are the only "bond" I know of that is free from interest rate risk.
Consensus of experts means nothing. They listen to each other and use the same data sources and aren't really independent. In April of 2014, Bloomberg surveyed 67 economists for their forecasts of what the ten-year Treasury yield would do over the next six months. 67 out of 67 said it would rise, total unanimity. It fell.

Here is how market forecasts of the Fed funds rates have compared with what actually happened.

The forecasting record of the Fed and the market

Image
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by dbr »

nisiprius wrote: Wed Oct 23, 2024 7:30 am The next point that needs to be made, Randle2Hard2Handle, is that you don't know what the yield curve is going to do. You really don't. You really don't. When you think you are dodging a bullet, you might be dodging into it.

Just stop trying to predict interest rates; just design your investing strategy around the idea that you can't. There are three workable possibilities I know of:
  1. Knowing your own planned time frame for holding a bond investment, and choosing bond funds whose durations are shorter than that. If you are super-cautious, half that.
Good info and good advice.

The "standard" three fund concept for a lifetime of investing usually mentions something like total bond index fund with a duration of around six or seven years. So a person who makes a choice like that is picking a duration of about 1/10 of 60 years of lifetime investing, 1/5 of a 30 year retirement and about 1/2 of the last ten years of life. You could call that super cautious or you could call it "works well enough for anyone."

Of course a person who finds it stressful and worrisome to not know for sure exactly what his fixed income is going to produce should not be in bond funds at all. Either that or they should change what causes that worrisome reaction to bond funds doing what they do.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Randle2Hard2Handle »

nisiprius wrote: Wed Oct 23, 2024 7:30 am Image
Do you need an account with imgur to upload that picture? Can't you just upload from your computer?
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by livesoft »

Randle2Hard2Handle wrote: Wed Oct 23, 2024 7:53 amDo you need an account with imgur to upload that picture? Can't you just upload from your computer?
One does not need an account with imgur to upload a picture. You can just upload to imgur from your computer, but you cannot upload to bogleheads.org directly.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by watchnerd »

Trance wrote: Wed Oct 23, 2024 7:29 am You forgot tips. They only rise and fall with the real yield. Essentially the risk component of inflation is removed.

The 10 year nominal government bond has had its yield, and so price, range from 1% to 15% in the 80s.

But the 10 year breakeven rate, which is what would set the 10 year tips yield if it was available back then, has only ranged from 1% to 3%. If inflation ever runs away like it did before, or could with war, etc., nominal bonds will rise and so prices will fall much harder as they compensate for inflation. But tips and their etfs won't have as much a distract change.

BND's (total nominal bond) average duration is 6 years and SCHP (total tips) is 6.8.

BND fell 12.65% the last 5 years due to rising rates. But SCHP only fell 6.84%

So it's possible to derisk your bonds by removing the inflation risk.
I hold a lot of TIPS and what you said is not correct.

TIPS have duration risk risk, too.

Their trading values rise and full with interest rate changes, just like nominals.

I see the values of my TIPS changing ever trading day.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by UpperNwGuy »

Randle2Hard2Handle wrote: Wed Oct 23, 2024 1:21 am There are three options:
Actually there are many other options. My favorite option, which is the one I have chosen to follow, is to stay the course with my intermediate bond funds.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Trance »

watchnerd wrote: Wed Oct 23, 2024 8:24 am
Trance wrote: Wed Oct 23, 2024 7:29 am You forgot tips. They only rise and fall with the real yield. Essentially the risk component of inflation is removed.

The 10 year nominal government bond has had its yield, and so price, range from 1% to 15% in the 80s.

But the 10 year breakeven rate, which is what would set the 10 year tips yield if it was available back then, has only ranged from 1% to 3%. If inflation ever runs away like it did before, or could with war, etc., nominal bonds will rise and so prices will fall much harder as they compensate for inflation. But tips and their etfs won't have as much a distract change.

BND's (total nominal bond) average duration is 6 years and SCHP (total tips) is 6.8.

BND fell 12.65% the last 5 years due to rising rates. But SCHP only fell 6.84%

So it's possible to derisk your bonds by removing the inflation risk.
I hold a lot of TIPS and what you said is not correct.

TIPS have duration risk risk, too.

Their trading values rise and full with interest rate changes, just like nominals.

I see the values of my TIPS changing ever trading day.
The change in value is because the real return the bond market is pricing is changing.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by watchnerd »

Trance wrote: Wed Oct 23, 2024 9:15 am
watchnerd wrote: Wed Oct 23, 2024 8:24 am

I hold a lot of TIPS and what you said is not correct.

TIPS have duration risk risk, too.

Their trading values rise and full with interest rate changes, just like nominals.

I see the values of my TIPS changing ever trading day.
The change in value is because the real return the bond market is pricing is changing.
Proportional to duration.

TIPS are not immune to duration volatility.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Trance »

watchnerd wrote: Wed Oct 23, 2024 11:02 am
Trance wrote: Wed Oct 23, 2024 9:15 am

The change in value is because the real return the bond market is pricing is changing.
Proportional to duration.

TIPS are not immune to duration volatility.
Oh yeah. My apologizes if I was being confusing. Bonds have credit, interest, and inflation risk. So yes I agree that your tips prices will fluctuate everyday. But what I'm saying is that the price changes are solely because of interest rate because credit risk and inflation risk (unexpected inflation) are removed. The price doesn't change because the market is pricing in inflation expectation changes, that's only nominal bonds.

Now depending on how long your bonds are that fluctuation will be greater or less, but I'm saying that when comparing them to bonds of similar duration they will have less downside risk because they are only composed of the interest/duration risk which is tied to the market asking price for real returns, compared to nominal bonds which price in real returns and then extra returns to compensate for expected inflation risk.

For example, 30 year nominal bond yields peaked at 15% in the 1980s. And up to that point nominal bonds got obliterated. In two years they went from a 7.5% to a 15% yield. Now if we had access to 30 year tips bonds back then, that spike would have been incredibly less drastic because the actual real returns of those bonds after inflation were much lower.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by nisiprius »

Randle2Hard2Handle wrote: Wed Oct 23, 2024 7:53 am Do you need an account with imgur to upload [images?]Can't you just upload from your computer?
The forum uses unmodified phpBB software. phpBB includes allows various features to be enabled or disabled. Image upload is one of them, and the Bogleheads forum owners decided to disable this one for reasons of legal exposure.

They can't monitor the forum 24x7 to inspect all image uploads, and if image uploads were allowed, there is a non-negligible chance of bad actors taking advantage of that to post and swap problematic content.

The forum policy has always been that you must use some other image-hosting site to host images, and link to images hosted elsewhere. There is a Wiki article, Posting images in the Bogleheads forum, although I see it's not completely up-to-date, which you may find helpful.

All of the free image hosting services do have problems of their own, including shutting down and vanishing. Imgur happens to be the one I use, but I can't say I particularly recommend it.

Another example of phpBB options which the forum owners have disabledm because of their beliefs on what is good for the forum community, include polls.
Last edited by nisiprius on Wed Oct 23, 2024 10:23 pm, edited 2 times in total.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by exodusing »

If you know what rates are going to do you can make a lot of money. As noted above, you really don't know.

If you stay short, you risk rates declining and missing out on the higher rates that were available. If the yield curve is positive, you also miss out on the higher rates that are available for longer bonds.

The general advice is to hold a portfolio that is no longer than your horizon. That way, if rates rise your principal value will decrease in the short run but the increased interest will more than make up for it over time, after which you're ahead.. If you're not going to hold long enough for that to happen, then your portfolio is too long. This is in nominal terms for nominal bonds and inflation adjusted terms for TIPS.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Lawrence of Suburbia »

My Vanguard Wellesley fund shares have a bond duration of 6.8 -- is that considered long, or intermediate?

Not that I plan to do anything about it, just curious.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by watchnerd »

Lawrence of Suburbia wrote: Wed Oct 23, 2024 11:33 am My Vanguard Wellesley shares have a bond duration of 6.8 ... is that considered long, or intermediate?
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by watchnerd »

Randle2Hard2Handle wrote: Wed Oct 23, 2024 1:21 am We are seeing an unprecedented steepening of the Treasury yield curve especially from the medium (3 years onward) to the the long-end (the 30-year mark).
BTW, this isn't unprecedented by any means.

See the Volcker-era interest rate moves.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by White Coat Investor »

Heaven forbid the world returns to normal. I'm glad to see the yield curve steepen if for no other reason than it signals normality.

If you want to minimize interest rate/term risk, keep your durations short. It really is that simple.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by nisiprius »

Lawrence of Suburbia wrote: Wed Oct 23, 2024 11:33 am My Vanguard Wellesley fund shares have a bond duration of 6.8 -- is that considered long, or intermediate?

Not that I plan to do anything about it, just curious.
There are no hard-and-fast definitions. But in my opinion it's cleanly "intermediate."

Vanguard calls it "medium" duration:

Vanguard website

I picked one Vanguard fund with the word "intermediate" in its name, the Vanguard Intermediate-term Bond Index Fund, BIV, and it too is called out as "medium" duration.

Image

Morningstar says it has "moderate" interest rate risk.

Bond funds called "long-term" typically durations over 15 years, so they are really different from 6.8 years.

Also, the U. S. Treasury uses the word "bonds" for 20- and 30-year terms, and that, to me, is what's considered "long"-term.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by afan »

If I could predict future yield curves, then I would rack up a few billion speculating on Treasury bonds. Then just live on my earnings and ignore market moves.

This is the largest and most liquid market in the world. Many people try to predict future rates and fail. I know I don't what interest rates will be in the future, so I do not make investment decisions that would only be profitable if my predictions were correct.
Speculating on interest rates is a loser game.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by steve r »

Tramper Al wrote: Wed Oct 23, 2024 6:46 am If you know that interest rates will increase substantially over the near term, then the way to avoid losses in your (anything but short term) bond ETF is not to own one. I don't, so I do.
Or "short" long term bonds. I mean, if you know. :wink:
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by glorat »

How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?
Hold them for longer than the duration of that ETF so that you'll enjoy the higher yields and you'll get a higher total return thanks to the interest rates going up than if they hadn't gone up at all
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Parkinglotracer »

I use a 5 year treasury ladder and have a few mature each year to redeem at face value ( and try to ignore interest rate fluctuations because there is no way to predict or time them ).

A ladder might be an option to consider.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Tom_T »

glorat wrote: Thu Oct 24, 2024 9:10 pm
How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?
Hold them for longer than the duration of that ETF so that you'll enjoy the higher yields and you'll get a higher total return thanks to the interest rates going up than if they hadn't gone up at all
Unless there is an extended period of rising rates, in which case the fund will take longer to catch up. You still get higher interest (eventually - it's not overnight), but the NAV could continue to sink until the rate hikes end.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by AnEngineer »

glorat wrote: Thu Oct 24, 2024 9:10 pm
How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?
Hold them for longer than the duration of that ETF so that you'll enjoy the higher yields and you'll get a higher total return thanks to the interest rates going up than if they hadn't gone up at all
Nothing guarantees you won't get a rate rise that tanks your fund value right before you want to sell.
That your facts or argument are wrong does not necessarily mean I disagree with your conclusion
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by exodusing »

AnEngineer wrote: Sat Oct 26, 2024 7:45 am
glorat wrote: Thu Oct 24, 2024 9:10 pm

Hold them for longer than the duration of that ETF so that you'll enjoy the higher yields and you'll get a higher total return thanks to the interest rates going up than if they hadn't gone up at all
Nothing guarantees you won't get a rate rise that tanks your fund value right before you want to sell.
You should hold a bond fund/portfolio with a duration appropriate to your horizon. If you're having the "value tank right before you sell" problem, then the fund was too long term for your horizon
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Tom_T »

exodusing wrote: Sat Oct 26, 2024 8:54 am
AnEngineer wrote: Sat Oct 26, 2024 7:45 am

Nothing guarantees you won't get a rate rise that tanks your fund value right before you want to sell.
You should hold a bond fund/portfolio with a duration appropriate to your horizon. If you're having the "value tank right before you sell" problem, then the fund was too long term for your horizon
I don't understand this. Even with an appropriate horizon, if there is, for example, a one-point rate hike right when I plan to sell, then doesn't the NAV take a hit? Seems like a bad timing problem, not a duration problem.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by dbr »

Tom_T wrote: Sat Oct 26, 2024 9:16 am
exodusing wrote: Sat Oct 26, 2024 8:54 am

You should hold a bond fund/portfolio with a duration appropriate to your horizon. If you're having the "value tank right before you sell" problem, then the fund was too long term for your horizon
I don't understand this. Even with an appropriate horizon, if there is, for example, a one-point rate hike right when I plan to sell, then doesn't the NAV take a hit? Seems like a bad timing problem, not a duration problem.
I don't understand what compels this concept of sell, envisioning sell the whole thing all at once.

If you plan to sell everything at a certain point you should not still be holding a duration long compared to the time to your sell date. The point is that bond funds have a constant duration so you would not hold bond funds anticipating eventually selling the whole thing. What you would do is hold a bond fund to take small withdrawals distributed over long times, probably how things work for a retiree withdrawing a couple % a year from a portfolio.

Alternatively if you really have a time in mind when you expect to sell everything, then you just buy a single bond that matures then.

If you think you might need to sell a whole position, but you don't know when, then you should probably hold the money in a cash equivalent such as a money market fund or even in bundles of large in the basement.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Kenkat »

The yield curve isn’t steepening so much as it is starting to flatten out into a more normal shape where longer durations earn higher rates. It’s not normal to be able to just keep rolling money over into 3 month treasuries or cram everything into a money market fund and receive high returns with no risk.

You can avoid capital loss in your bond funds by keeping durations short. Unfortunately, you also lose being able to lock in higher rates on longer term bonds when short term rates do eventually fall. You end up holding a bunch of short term investments that earn low returns and have to then go out the yield curve in search of higher returns.

If you can time all this out you can have the best of both worlds. My experience is that you can’t time all this out though.

If you are invested in bonds or bond funds that match your timeframe, you don’t really care about all of this. If you are still investing in bond funds, the higher future rates will eventually offset shorter term capital losses. If you are drawing down a fund slowly for retirement, say over 20 years, the same thing applies. If you need all of this money next week or next year, you should be in a short term investment such as cash or a money market fund. But otherwise, I’d tune out the noise.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by AnEngineer »

exodusing wrote: Sat Oct 26, 2024 8:54 am
AnEngineer wrote: Sat Oct 26, 2024 7:45 am

Nothing guarantees you won't get a rate rise that tanks your fund value right before you want to sell.
You should hold a bond fund/portfolio with a duration appropriate to your horizon. If you're having the "value tank right before you sell" problem, then the fund was too long term for your horizon
Say my time horizon is 10 years. What duration bond fund should I buy and when should I sell/change to a different duration fund?
That your facts or argument are wrong does not necessarily mean I disagree with your conclusion
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by dbr »

AnEngineer wrote: Sat Oct 26, 2024 11:36 am
exodusing wrote: Sat Oct 26, 2024 8:54 am

You should hold a bond fund/portfolio with a duration appropriate to your horizon. If you're having the "value tank right before you sell" problem, then the fund was too long term for your horizon
Say my time horizon is 10 years. What duration bond fund should I buy and when should I sell/change to a different duration fund?
If you mean by time horizon that you are going to liquidate the holding at a date ten years from now you probably don't want that money in any kind of bond fund. A bond maturing in 10 years would be appropriate.

If you mean by horizon steady withdrawals over a period of 20 years or so with an average time to withdrawal of 10 years an intermediate term bond fund with a duration around 6 or 7 years is fine, or it could be a little longer. An alternative would be a liquidating 20 year bond ladder.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by AnEngineer »

dbr wrote: Sun Oct 27, 2024 6:52 am If you mean by horizon steady withdrawals over a period of 20 years or so with an average time to withdrawal of 10 years an intermediate term bond fund with a duration around 6 or 7 years is fine, or it could be a little longer.
Let's take this case. In year 14 I'm holding a 6 year duration bond fund. Interest rates jump so the fund value drops right before I'm about to sell some for the year. What is the way I'm supposed to avoid this?

My point is not don't hold a bond fund, but rather that the argument that I was replying to, i.e. that you can avoid the risk of interest rates rising by holding long enough, is wrong because the value could always drop just before you need to sell.
That your facts or argument are wrong does not necessarily mean I disagree with your conclusion
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by dbr »

AnEngineer wrote: Sun Oct 27, 2024 1:39 pm
dbr wrote: Sun Oct 27, 2024 6:52 am If you mean by horizon steady withdrawals over a period of 20 years or so with an average time to withdrawal of 10 years an intermediate term bond fund with a duration around 6 or 7 years is fine, or it could be a little longer.
Let's take this case. In year 14 I'm holding a 6 year duration bond fund. Interest rates jump so the fund value drops right before I'm about to sell some for the year. What is the way I'm supposed to avoid this?

My point is not don't hold a bond fund, but rather that the argument that I was replying to, i.e. that you can avoid the risk of interest rates rising by holding long enough, is wrong because the value could always drop just before you need to sell.
You don't avoid it. The actual answer to "selling some" is that sometimes you win some (prices are up) and sometimes you lose some (prices) are down. For many small transactions (for example monthly/quarterly/annually over long times (say 10-20-30-40 years) it averages out. This is standard for withdrawing from any store of wealth over time. If the transactions are few and large large and the time is short, you use a shorter bond fund or something that does not have any volatility.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by AnEngineer »

dbr wrote: Sun Oct 27, 2024 6:30 pm You don't avoid it.
Precisely my disagreement with glorat's claim.
That your facts or argument are wrong does not necessarily mean I disagree with your conclusion
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Dude2 »

AnEngineer wrote: Sun Oct 27, 2024 6:46 pm
dbr wrote: Sun Oct 27, 2024 6:30 pm You don't avoid it.
Precisely my disagreement with glorat's claim.
Can we distinguish between the cases below?
-- you go from a long duration fund to cash (zero duration) immediately
-- you move from one pile of money at duration A to another pile of money at (shorter) duration B

In other words, if your plan includes being in control of your duration, theoretically you are immune to interest rate changes. Your need for the money matches your duration. Case 1 is crazy. Case 2 describes ambivalence.

Of course, there are day to day volatilities, and that is somewhat scary. I can see the argument for not doing things "all at once", e.g. quarterly?

On the other hand, if not doing anything related to ladders or LMP type concepts, if only considering bonds as uncorrelated to stocks, then whatever the plan is, if bonds tank, you replenish from stock money, and visa-versa.

So, neither plan involves realizing a loss as extreme as case 1.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Tom_T »

dbr wrote: Sun Oct 27, 2024 6:30 pm
AnEngineer wrote: Sun Oct 27, 2024 1:39 pm

Let's take this case. In year 14 I'm holding a 6 year duration bond fund. Interest rates jump so the fund value drops right before I'm about to sell some for the year. What is the way I'm supposed to avoid this?

My point is not don't hold a bond fund, but rather that the argument that I was replying to, i.e. that you can avoid the risk of interest rates rising by holding long enough, is wrong because the value could always drop just before you need to sell.
You don't avoid it. The actual answer to "selling some" is that sometimes you win some (prices are up) and sometimes you lose some (prices) are down. For many small transactions (for example monthly/quarterly/annually over long times (say 10-20-30-40 years) it averages out. This is standard for withdrawing from any store of wealth over time. If the transactions are few and large large and the time is short, you use a shorter bond fund or something that does not have any volatility.
Also: if I invest in a bond fund with the intention of periodically withdrawing just the earnings, technically I don't care about the NAV because I'm just withdrawing interest, not selling shares. 100K in a bond fund could throw off 4K in annual income; if rates rise, I get more income. If rates fall, then I have an opportunity to sell shares at a higher NAV.
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by wwhan »

If one wanted to keep all fixed income in a IRA/401K with mostly safe Bond funds and still needed to do RMDs every year, they might allocate;

50% VGIT ......average duration 5.0 years
40% VGSH .....average duration 1.9 years
10% VUSXX....Average maturity 37.0 days, Weighted average life 46.0 days

Alternatively owning specific bonds and T-bills provides a more defined income rate.

If the portfolio stock allocation could be in just Taxable and Roth accounts.
"Everything in Moderation, including Moderation"
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by urban »

wwhan wrote: Mon Oct 28, 2024 6:07 pm If one wanted to keep all fixed income in a IRA/401K with mostly safe Bond funds and still needed to do RMDs every year, they might allocate;

50% VGIT ......average duration 5.0 years
40% VGSH .....average duration 1.9 years
10% VUSXX....Average maturity 37.0 days, Weighted average life 46.0 days

Alternatively owning specific bonds and T-bills provides a more defined income rate.

If the portfolio stock allocation could be in just Taxable and Roth accounts.
But you loose state income tax deductions keeping treasury bonds funds in a IRA/401K, right?
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by wwhan »

urban wrote: Mon Oct 28, 2024 6:23 pm
wwhan wrote: Mon Oct 28, 2024 6:07 pm If one wanted to keep all fixed income in a IRA/401K with mostly safe Bond funds and still needed to do RMDs every year, they might allocate;

50% VGIT ......average duration 5.0 years
40% VGSH .....average duration 1.9 years
10% VUSXX....Average maturity 37.0 days, Weighted average life 46.0 days

Alternatively owning specific bonds and T-bills provides a more defined income rate.

If the portfolio stock allocation could be in just Taxable and Roth accounts.
But you loose state income tax deductions keeping treasury bonds funds in a IRA/401K, right?
Yes, but they are safe US government investments. One can always use corporate bond funds for higher yields, with similar durations.

Sometimes a good enough plan compared to searching for the perfect plan works just fine.
"Everything in Moderation, including Moderation"
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Re: How to Avoid Having Your Bond ETF Sink As the Yield Curve Steepens and Interest Rates Go Up?

Post by Prudence »

dbr wrote: Sun Oct 27, 2024 6:52 am
AnEngineer wrote: Sat Oct 26, 2024 11:36 am

Say my time horizon is 10 years. What duration bond fund should I buy and when should I sell/change to a different duration fund?
If you mean by time horizon that you are going to liquidate the holding at a date ten years from now you probably don't want that money in any kind of bond fund. A bond maturing in 10 years would be appropriate.

If you mean by horizon steady withdrawals over a period of 20 years or so with an average time to withdrawal of 10 years an intermediate term bond fund with a duration around 6 or 7 years is fine, or it could be a little longer. An alternative would be a liquidating 20 year bond ladder.
What do you mean by "an average time to withdrawal of 10 years" in that sentence?
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