VBTLX is an aggregate US investment grade bond fund with maturities of its bonds ranging from 1-3 to 20-30 years. The effective duration is 6 and effectiove maturity is 8.4 years. It has a particular exposure to the 20-30 year maturity segment at 28%: this is the largest segment of its holding. That portion, as well as anything beyond 1 year, are gonna be affected by the yield curve that is steepening the most from 5 to 30 years. Steepening here means the interest rate is going up. When the IR goes up, the present value factor decreases, especially for the interest payments that are pending and due further out. A 20-year US Treasury that makes interest payments biannually 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. The YC is threatening to further steepen and when that happens, we could go near 5% or beyond and our bond prices would be crushed, despite the higher interest payments we would receive.All, I had a good chunk of money in VBTLX, and as the market rose it was falling. In fact, how it behaved felt completely random, and no matter how much I read or watch youtube, I can't get my head round what's happening.
You should stick to the shortest portion of the YC for your taxable accounts: i.e., 0-3 Months US Treasury Bill ETFs: SGOV / BIL. Or US Floating Rate Note (FRN) ETFs: USFR / TFLO. Or something like 0-12 Months US Treasury Bill ETFs: SHV / BILS / TBLL.
For your non-taxable accounts, I would focus on Corp Float Rate Note (FRN) ETFs: FLOT/ FLRN / FLTR / VRIG. Or I would go into a very short 1-5Y corporate bond ETF like PULS, which has an effective duration of 0.21 or 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.
Or just buy 3-month US Treasury Bills and hold them to maturity.
Statistics: Posted by Randle2Hard2Handle — Wed Oct 23, 2024 12:53 am — Replies 32 — Views 2084
