BND Holders Are About to See a Dramatic Shift in Monthly Payouts
BND has lost ground in price for five years straight, yet something has quietly shifted inside the fund that changes what the next five years could look like for anyone holding it today.
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The Vanguard Total Bond Market ETF (NASDAQ:BND) fell to roughly $70 on Thursday, a new 52-week low. BND holds $161.8 billion, more than any other bond ETF, and many owners of BND treat it as the safe half of their portfolio.
That safety has been hard to find lately. The share price is down 2% this year and 3% over five years. Both figures exclude the monthly distributions, which offset part of the loss.
Five years is long enough to show a real problem. A core bond fund should hold steady while stocks swing, but this one has lost ground in price for half a decade. The forces that caused those losses now point the other way, changing the fund’s outlook.
Why a Bond Fund Falls Without a Single Default
Bond prices move opposite to yields. When the ten-year Treasury yield rises, every existing bond with a lower coupon loses value, and a fund holding thousands of them marks its portfolio down that day.
Reuters reported that the ten-year yield rose 87 basis points in the third quarter, the sharpest quarterly rise since 1994. It reached 5.3% this week, the highest level since 2002.
That quarter explains BND’s 2% drop over the past month. The losses came from markdowns on bonds that kept paying interest.
The Fed added to the pressure in September by raising its upper target rate to 4%. That reversed part of a long series of cuts.
Three Conditions That Made This Drawdown Unusual
This cycle produced the first negative 5-year return in the history of the investment-grade intermediate index, with a nearly 20% decline from the 2020 peak. This was due to three conditions hitting at once: starting yields were too low, rates rose very fast, and inflation ran high.
Any one alone is survivable. A slow rise in rates gives coupons time to offset price losses, and a fast rise from a high starting yield comes with an income buffer.
In 2021, BND paid around 14 cents per share each month. That was far too little income to absorb the price hit once rates rose.
Higher Starting Yields Change the Next Five Years
A bond fund’s forward return depends mostly on its starting yield. Carlson wrote that yields are now at levels we haven’t seen in almost 20 years.
BND’s September payout was about 25 cents, and its trailing distribution yield is 4.2%. Because maturing bonds get replaced with new ones paying more, that trailing figure trails current market rates.
If rates keep rising, prices fall again. But every month’s income now goes into new bonds at higher yields, so the position recovers much faster than it could in 2021.
The 0.03% expense ratio matters more when expected returns are low. The iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG) charges the same fee and fell nearly the same 3% over five years, so switching gains little.
How BND Could Keep Falling From Here
Bond buyers are likely to keep demanding extra yield to lend long until the Fed delivers real monetary tightening. September’s increase started the process but didn’t finish it.
Inflation supports that concern. The Fed’s preferred core price index rose 0.2% in August alone and set a new high.
Cash also competes directly with the fund. The three-month Treasury bill yields 4.2%, about matching BND’s trailing yield with no price risk. The direction of the ten-year yield, BND’s yield compared with cash rates, and whether inflation reports stop surprising to the upside will likely decide the fund’s next move.
BND suits investors with a multi-year horizon who want duration as a hedge against economic slowdown and can accept losses along the way. When growth weakens, yields usually fall, and intermediate bonds rise in price.
It has too much price risk for money needed within a year or for a bond allocation treated as cash, where Treasury bills or short-duration funds hold value more steadily.
A 52-week bill yields 4.4% with almost no price risk, but when it matures you reinvest at whatever rates are on offer, and those could be much lower after a slowdown.
Five years ago yields sat near record lows, while the next five start near two-decade highs. That gives BND stronger forward return prospects today than when it looked safest.
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Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth, cyclical, and dividend equities that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as penny stocks.
