Inverted Yield Curve, should i be buying VBTLX?

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Trust_In_TylerDurden
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Inverted Yield Curve, should i be buying VBTLX?

Post by Trust_In_TylerDurden »

hey friends,

i am trying to rebalance my portfolio according to Taylor's 3 fund portfolio and wondering what impact/risks are introduced because of Inverted Yield Curve trend.

should i buy VBTLX Vanguard Total Bond Market Index Fund Admiral Shares at this time? why/why not? should i buy ALL at once or Dollar cost average it?

sorry if its a no-brainer for you guys, but i want to make sure i am making the right decision and ALSO understand why i am making it.

cheers,
tyler
=======

https://www.cnn.com/2019/05/29/investin ... index.html

The bond market is freaking out. Here's why that matters

New York (CNN Business)The bond market is once again sending a big fat warning sign about the US economy. Fixed-income investors appear to be worried about a possible recession sometime soon.

The yield on the benchmark 10-Year US Treasury is now just 2.22% — the lowest level since September 2017. Yields fall as investors buy more bonds, which they typically do during times of economic malaise. It's a so-called flight to safety.

This current rush into bonds appears to be because investors are fearful of a drawn out trade war between the US and China.
"Bonds are rallying as a haven asset, dragging the yields lower as investors fret over stalled US — China trade talks. Sentiment is taking a turn for the worse as trade tensions between the two powers show no signs of easing," said Jasper Lawler, head of research at London Capital Group, in a report.
Inverted yield curve is often a sign of bad things to come

The yield on the 3-month US bond is currently higher than the 10-year, hovering around 2.35%. That's another cause for concern. When short-term rates are higher than long-term yields, that is called an inverted yield curve.

That typically happens before a recession.

"When the yield curve inverts, it's not the time to borrow money to take a vacation to Orlando. It is the time to save, to build a cushion," said Campbell Harvey, a finance professor at Duke University and partner and senior advisor at investing firm Research Affiliates, in a video interview for Research Affiliates.
Last edited by Trust_In_TylerDurden on Wed May 29, 2019 7:40 pm, edited 3 times in total.
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Dialectical Investor
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by Dialectical Investor »

I can't read the article, but if you plan on altering your stock/bond allocation based on trends, you're going to have to read a lot more articles. Perhaps if you share your particular concerns regarding a flat or inverted yield curve, you will get more specific responses.
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by boglenomics »

The link seems broken but I would "stay the course". It's just noise.

VBTLX consists of different maturity dates in the underlying fixed income assets so an inversion of the yield curve shouldn't cause too much of a stir.

If you're curious here's the maturity breakdown: https://investor.vanguard.com/mutual-fu ... olio/vbtlx
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Trust_In_TylerDurden
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by Trust_In_TylerDurden »

Dialectical Investor wrote: Wed May 29, 2019 7:37 pm I can't read the article, but if you plan on altering your stock/bond allocation based on trends, you're going to have to read a lot more articles. Perhaps if you share your particular concerns regarding a flat or inverted yield curve, you will get more specific responses.
thanks, sorry about the broken link: here is the article: https://www.cnn.com/2019/05/29/investin ... index.html
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by Dialectical Investor »

If I knew a deflationary recession was on the horizon, selling stocks and buying bonds is what I would be doing, the longer the term the better. While a long-term Treasury fund is what I would prefer, I would expect VBTLX to do just fine in such a scenario. So while I have no idea if that is what is going to happen, the prospect of the occurrence is not a reason to avoid buying VBTLX according to plan, IMO.
bizkitgto
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by bizkitgto »

Can anyone explain why people are buying long term treasuries like the 10Y vs shorter term (2Y) when the yield curve inverts? If you want a safe haven, why not chose the safest one with the best return (short term treasuries in this case)? Or - are investors banking on longer term treasuries (like $TLT) going up in value as people rush into safety?
Keep it simple: 20% BND, 50% VTI and 30% VXUS
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by Dialectical Investor »

bizkitgto wrote: Thu May 30, 2019 8:53 am Can anyone explain why people are buying long term treasuries like the 10Y vs shorter term (2Y) when the yield curve inverts? If you want a safe haven, why not chose the safest one with the best return (short term treasuries in this case)? Or - are investors banking on longer term treasuries (like $TLT) going up in value as people rush into safety?
It could be for the greater capital appreciation from longer duration securities if they expect a general shift downward in the yield curve. It could be because they expect short-term Treasury securities soon will yield much less and they want to lock in longer-term rates that may fall as well. It also could be because they hold longer-term securities in general regardless of the current yield curve.
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by livesoft »

One beauty of the 3-fund portfolio and having an asset allocation plan is that the OP's question just doesn't come up. So if the plan is to have BB% in bonds, then make sure one has BB% in bonds by buying VBTLX or selling VBTLX to get to BB% in bonds. There is no need to worry or think about any news or information or misinformation that one might come across.
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J G Bankerton
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by J G Bankerton »

Trust_In_TylerDurden wrote: Wed May 29, 2019 7:32 pm
should i buy VBTLX Vanguard Total Bond Market Index Fund Admiral Shares at this time? why/why not?
BND is 15 points less in fees so if you want to catch a rising knife go for BND instead of VBTLX,
bizkitgto
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by bizkitgto »

livesoft wrote: Thu May 30, 2019 9:17 am One beauty of the 3-fund portfolio and having an asset allocation plan is that the OP's question just doesn't come up. So if the plan is to have BB% in bonds, then make sure one has BB% in bonds by buying VBTLX or selling VBTLX to get to BB% in bonds. There is no need to worry or think about any news or information or misinformation that one might come across.
What do you mean by 'BB%'?
Keep it simple: 20% BND, 50% VTI and 30% VXUS
livesoft
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by livesoft »

I mean percentage of allocation selected for the bond fund portion of the 3-fund portfolio. For instance, if one has a 60/40 allocation of stocks and bonds, then BB% = 40%. In your signature, BB% is 20%.
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betablocker
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by betablocker »

You would buy longer term because as rate cuts happen they effect the short term bonds most directly. The longer term bonds you already had would then have a higher yield. Effectively the fed would be cutting rates to get the yield curve back to a normal slope. Trying to time this stuff is nonsense though. I don't think total bond is the way to go anytime. Too much risk. Go with intermediate treasuries or a blend of intermediate and shorter term.
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by vineviz »

bizkitgto wrote: Thu May 30, 2019 8:53 am Can anyone explain why people are buying long term treasuries like the 10Y vs shorter term (2Y) when the yield curve inverts? If you want a safe haven, why not chose the safest one with the best return (short term treasuries in this case)? Or - are investors banking on longer term treasuries (like $TLT) going up in value as people rush into safety?
The reason is that the fundamental premise (i.e. that short term treasuries are the "safest one with the best return") is incorrect.

In the context of interest rate risk, the safest bond is the one that most closely matches your investment horizon not the shortest term bond.

As a result, truly passive long-term investors will generally own long-term bonds regardless of what the current yield curve looks like.

The exception would be that their risk tolerance level is so low the they must hold cash and/or short term bonds to lower the volatility of the portfolio. But, again, they would do this regardless of the shape of the yield curve. Adjusting the asset allocation based on the yield curve is market timing, which has a low probability of working out.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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J G Bankerton
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by J G Bankerton »

Selling stock to buy bonds for most would trigger a taxable event; in my case it would be taxed as regular income at a marginal rate of 51%. Buy and hold.
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Tyler Aspect
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by Tyler Aspect »

A yield inversion event is an indicator of an economic recession within 2 years. I usually look at a comparison of 6 month treasury yield versus 5 year treasury yield, but other people may use different metrics. An indicator may ultimately prove to be a false-positive signal.

This is a good time to make sure you have enough emergency cash saved. Update your resume; reconnect with your former business friends.

Whether to reduce one's asset allocation is a more subtle issue. Looking from year 2004 to 2014, reducing asset allocation from (60% stock / 40% bond) to (40% stock / 60% bond) reduces worst case draw-down by 10%, but the ten year period total return was also reduced by 10%. This is symmetric; reducing risk means reducing return.

I would recommend setting asset allocation figure to a point that is without speculative tendencies, and stick to it throughout the downturn. Plan your rebalance strategy ahead of time so that you are not driven by panic actions. (Stay the course)
Last edited by Tyler Aspect on Thu May 30, 2019 11:48 am, edited 1 time in total.
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by harvestbook »

You can find plenty of posts here from a year ago that declared with complete confidence that "bond rates have nowhere to go but up." In other words, nobody knows anything for sure. Total Bond Fund covers all the bases.
I'm not smart enough to know, and I can't afford to guess.
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by Wiggums »

harvestbook wrote: Thu May 30, 2019 11:48 am You can find plenty of posts here from a year ago that declared with complete confidence that "bond rates have nowhere to go but up." In other words, nobody knows anything for sure. Total Bond Fund covers all the bases.
+1

Nobody knows the future.
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by wolf359 »

J G Bankerton wrote: Thu May 30, 2019 10:48 am Selling stock to buy bonds for most would trigger a taxable event; in my case it would be taxed as regular income at a marginal rate of 51%. Buy and hold.
Suggestion: Do your stock / bond rebalancing in your tax sheltered accounts (401k and IRA). My taxable holdings look out of whack, but I combine them with my overall portfolio for asset allocation.

Also, use specific identification of shares in the taxable account. If you ever do have to sell, you can pick the shares with the least tax bite.

I agree that the best strategy for taxable accounts is to buy and hold as long as you can.
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J G Bankerton
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by J G Bankerton »

wolf359 wrote: Thu May 30, 2019 12:02 pm Suggestion: Do your stock / bond rebalancing in your tax sheltered accounts (401k and IRA

I'm forbidden by law from opening or contributing to a tax advantaged account. I don't want income so I buy stock because there is no tax event when I buy and there is little income.

Investing is EZ taxes are hard.
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by greg24 »

J G Bankerton wrote: Thu May 30, 2019 9:21 am
Trust_In_TylerDurden wrote: Wed May 29, 2019 7:32 pm
should i buy VBTLX Vanguard Total Bond Market Index Fund Admiral Shares at this time? why/why not?
BND is 15 points less in fees so if you want to catch a rising knife go for BND instead of VBTLX,
BND expenses are 1.5 basis points less than VBTLX, not 15.

While I strongly prefer to minimize expenses, I'd buy based on whether or not a mutual fund or ETF works for you, not on the expense difference.
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J G Bankerton
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by J G Bankerton »

greg24 wrote: Thu May 30, 2019 2:03 pm
While I strongly prefer to minimize expenses, I'd buy based on whether or not a mutual fund or ETF works for you, not on the expense difference.
I can't see any disadvantage with ETF that have lower fees.
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greg24
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by greg24 »

Well, I don't have a brokerage account, so I'd have to open one just to buy BND. That isn't worth 1.5 bp to me.
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J G Bankerton
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by J G Bankerton »

greg24 wrote: Thu May 30, 2019 3:57 pm Well, I don't have a brokerage account, so I'd have to open one just to buy BND. That isn't worth 1.5 bp to me.
Vanguard strongly encouraged/forced me to switch to a brokerage account. New investors MUST open a brokerage account. It isn't an evil brokerage account, Vanguard's bots only do what I want when I want, I notice my account is labeled as self directed.

The lower fees on many ETF compared to the Admiral shares make it worth wile for those who watch pennies so the dollars can take care of themselves. :greedy
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by retiredflyboy »

Stay the course! Noise! Proper AA for total stock total international and total bond. Forget the 24/7 financial media. All this information makes people feel they need to act on it, don’t! Stay the course!
Facts are stubborn things. Everything works until it doesn’t.
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J G Bankerton
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by J G Bankerton »

Buy VTI, catch that knife. :greedy
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by wolf359 »

J G Bankerton wrote: Thu May 30, 2019 1:44 pm
wolf359 wrote: Thu May 30, 2019 12:02 pm Suggestion: Do your stock / bond rebalancing in your tax sheltered accounts (401k and IRA

I'm forbidden by law from opening or contributing to a tax advantaged account. I don't want income so I buy stock because there is no tax event when I buy and there is little income.

Investing is EZ taxes are hard.
In that case, buy and hold is the best strategy for you. There's nothing wrong with never rebalancing. It's a valid approach. Studies can't conclusively prove the rebalancing bonus exists.

Your only other option is to rebalance slowly, by having dividends and interest pay to cash, and using the cash and new purchases to buy whatever asset is below it's desired allocation.
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J G Bankerton
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Re: Inverted Yield Curve, should i be buying VBTLX?

Post by J G Bankerton »

wolf359 wrote: Mon Jun 03, 2019 8:53 am In that case, buy and hold is the best strategy for you. There's nothing wrong with never rebalancing. It's a valid approach. Studies can't conclusively prove the rebalancing bonus exists.
When I had REITs and bonds rebalancing did help buying low. I only rebalanced by buying because selling triggered massive taxes. A year ago I sold all regular income generating securities except for a money market "emergency" fund.

This works for me because I don't need or want any more income, especially regular income because I'm in a 51% marginal tax bracket. :shock:
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