Actually, the advice is not quite correct, because of the quote "fed interest rates". The rate that the Fed targets is not the relevant rate for a bond fund, as it is a very-short-term rate; Total Bond Market holds bonds with longer terms, and thus different yields. Bond funds report an SEC yield, which is the average current yield of all the bonds in the fund. VBTLX currently reports a 4.53% SEC yield. That is the best measure of the long-term return.The advice is correct, except you can't really foresee which rates will go.Unfortunately, to me, understanding the nature of how bonds work has proven difficult. Someone told me that when fed interest rates are at their highest is the best time to buy a bond fund like VTBLX, and the worst time to buy is when interest rates are at their lowest and rising. Yields are higher when interest rates are high, but the bond increases in value as interest rates decrease(?).
I'm 53 this year, so I just chose to allocate 20% of what was 100% equities (VFIAX) to the VTBLX fund. I have at least 10 years before I start withdrawing, so hopefully this will work out.
Is VTBLX good to own if you buy when interest rates are high and foreseen to go down, or did I get bad advice?
The effect is not quite this large, because of bond maturity. An infinite-maturity bond would lose this much. Bond funds report a "duration", which is a measure of the interest-rate risk. If a bond has a 7-year duration, then it will lose 7% of its value if its yield rises by 1%. Total Bond Market holds bonds which average that duration, so it will lose 7% if all of its bond yields rise by 1%.To answer your (?) question, imagine you buy a bond for $100 with a 5% yield, and tomorrow someone offers for sale a $100 bond with a 6% yield. Why would someone buy your bond from you when they can get a higher yield from the other bond? Instead, they will offer you some lower price, say $83, such that the $5 coupon payment is worth 6% of the price.
Statistics: Posted by grabiner — Sun Jul 28, 2024 4:54 pm