Author Topic: Why is Vanguard's BND performing so well?  (Read 1245 times)

neonlight

  • Stubble
  • **
  • Posts: 216
Why is Vanguard's BND performing so well?
« on: June 19, 2019, 04:03:36 AM »
YTD is 5%+, which is very good for a bond ETF. Well, many bond ETFs are doing well.

Anything to do with equity market hovering at all time high?

Notch

  • 5 O'Clock Shadow
  • *
  • Posts: 97
  • Age: 30
  • Location: Australia
Re: Why is Vanguard's BND performing so well?
« Reply #1 on: June 19, 2019, 04:07:55 AM »
More to do with interest rate expectations.  When the markets thinks they will go down, bonds go up in value.

neonlight

  • Stubble
  • **
  • Posts: 216
Re: Why is Vanguard's BND performing so well?
« Reply #2 on: June 19, 2019, 04:08:54 AM »
More to do with interest rate expectations.  When the markets thinks they will go down, bonds go up in value.

Novice here. Why is that?

BTDretire

  • Magnum Stache
  • ******
  • Posts: 3033
Re: Why is Vanguard's BND performing so well?
« Reply #3 on: June 19, 2019, 07:37:42 AM »
 Fairly simple: say you have a bond worth $1,000 paying 4%, earning $40.
As an extreme, to help show the point, new bond rates drop to 3%.
Now a $1,000 bond only earns $30.
To earn the $40, the 4% bond is paying, you would need to invest $1,333.33 at the new 3% rate.
This makes your 4% bond worth very near $1,333.33.
I hope I made that clear, not sure.

Edit:
I reread and see I didn't answer the exact question, but with my example and,
bonds buyers thinking rates might go down, you can see why they might pay more
for a higher interest rate bond.
« Last Edit: June 19, 2019, 07:43:08 AM by BTDretire »

Andy R

  • Bristles
  • ***
  • Posts: 324
Re: Why is Vanguard's BND performing so well?
« Reply #4 on: June 19, 2019, 07:44:43 AM »
More to do with interest rate expectations.  When the markets thinks they will go down, bonds go up in value.

Novice here. Why is that?


When interest rates go up, since the interest return on an existing bond is guaranteed at the previous lower rate to what is now available in the market, the bond goes down in value to compensate anyone who will buy it. Otherwise they would just go and purchase a newly issued bond instead.

For example, lets say you had a 7 year duration bond and interest rates went up by 1%. Your principle would go down by 7% to compensate for the 1% interest lost each year for the remaining 7 years.

Conversely, if interest rates go down but you still have the previous guaranteed rate that is higher, the value of the bond will go up.

MoneyGoatee

  • Stubble
  • **
  • Posts: 112
Re: Why is Vanguard's BND performing so well?
« Reply #5 on: June 19, 2019, 09:03:53 AM »
Bond prices are important only when you buy and/or sell.  If you use bonds to generate income as most people do, you generally don't care.  The Vanguard BND performance page shows separate columns for price (capital return) and interest (income return).  While the price may fluctuate, the interest stays roughly the same, depending on the interest rates of the day, of course.  Only when prices fluctuate wildly (as in the Long Term Treasury Fund a few years ago) do they noticeably affect your income, but those are rare occasions.

Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1169
  • Age: 44
Re: Why is Vanguard's BND performing so well?
« Reply #6 on: June 19, 2019, 10:41:53 PM »
More to do with interest rate expectations.  When the markets thinks they will go down, bonds go up in value.

Novice here. Why is that?

Try this https://portfoliocharts.com/2019/05/27/high-profits-at-low-rates-the-benefits-of-bond-convexity/