Quick Read
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BND's yield to maturity hit 5.6% as the 10-year Treasury climbed to its highest level since 2007, leaving the fund down just 1% this year.
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Over five years, $100k in BND shrank to $98k while SGOV grew to $121k and FLOT to $124k, both carrying far less rate risk.
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Buyers who entered BND in October 2023 have already gained 17%, beating SGOV's 14% return even as rates climbed higher.
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Before September 23, the 10-year Treasury had not closed at 5.1% or higher since July 13, 2007, and it closed there again on October 15. The Vanguard Total Bond Market ETF( NASDAQ:BND ) is down 1% this year with dividends included.
That rise in yields drove BND's 30-day SEC yield (a standardized measure of recent income) up to 5.2% and its yield to maturity (the annual return if holdings are kept until they mature) up to 5.6%. The 10-year Treasury yield is above its October 2023 peak and near its highest level since 2007, and BND's trailing payout yield is the highest in at least five years.
Why the Fed Pushed Yields Past 5%
The Fed raised rates 0.25 points on September 16, which set a 3.75% to 4.00% range. Its statement said, "Inflation remains elevated."
September consumer prices rose 3.7% from a year ago, with core inflation at 2.6%.
After that report, futures priced a 42% chance of another hike at the October 27-28 meeting. That was up from 22%.
The 10-year topped out at 5.3% on October 5, up from 4.2% at the end of 2025. When yields rise, the prices of bonds already issued fall, and that is why BND has slipped.
But the same move raises what each new dollar in the fund makes. Coupons and maturing bonds get reinvested at the higher yields.
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Five Years of Losses Give Sellers a Case
BND finished last of 12 bond ETFs tested this year. Over five years, $100,000 in the fund fell to about $98,220.
The same amount grew to $120,580 in the iShares 0-3 Month Treasury Bond ETF( NYSEARCA:SGOV ), which holds Treasury bills maturing within three months. In the iShares Floating Rate Bond ETF( NYSEARCA:FLOT ), it grew to $124,390, and both funds carry little rate risk.
BND also stands 4% below its August 2020 peak with dividends included, so long-time holders who bought near that peak are still behind. That stretch began with yields near record lows, while buyers today start with far more income.
Why a 5.6% Yield Changes the Math
BND's 5.6% yield to maturity compares with 3.7% for SGOV and 4.1% for FLOT. Its 0.03% fee leaves you with nearly all of that income.
An investor in BND on October 19, 2023, when the 10-year was near 5%, has gained 17%. SGOV returned 14% over the same period, even though rates are higher today than they were then.
Duration, which is 5.7 years for BND, is a rough guide to how much the price moves in percentage terms for each point change in rates, and to how long reinvested income takes to make up for a price drop. In the model, BND returns about 4.9% to 5.2% a year over five years whether rates rise 1 point or fall 2 points.
What $100,000 Earns Under Four Rate Paths
These one-year figures are model estimates. They show how much the direction of rates changes each result.
| Rate path |
BND |
SGOV |
|---|---|---|
| Rise 1 point |
$99,450 |
$104,130 |
| Flat |
$105,150 |
$103,740 |
| Fall 1 point |
$110,850 |
$103,350 |
| Fall 2 points |
$116,550 |
$102,960 |
When rates rise, FLOT reaches $104,590, and BND ends just under its starting value. That small shortfall is offset by the lead BND builds when rates fall.
Over three years, a switch to SGOV wins only if rates jump about 0.7 points or more soon and stay there. T-bill yields would also reset lower quickly if the Fed later cuts.
A hike in late October or hotter inflation would hurt BND in the near term. Even so, several years of high rates would still favor BND, because its income resets higher.
How BND Fits a Portfolio at a 5.6% Yield
For money with three or more years to work, BND offers a 5.6% yield to maturity, which puts it ahead of the cash alternatives in most of the projected rate paths. Its 69% weighting in U.S. government bonds tends to hold up when stocks fall hard.
Money needed within one to two years fits more naturally with SGOV, FLOT or the Vanguard Short-Term Treasury ETF( NASDAQ:VGSH ), since another 1-point rise would cost BND about $5,700 per $100,000. SGOV carries the least rate risk for that money.
Buying in stages spreads out the risk around the Fed meeting. BND's interest is taxed as ordinary income, so holding it in an IRA postpones that tax.
An investor who holds BND in a taxable account with losses from purchases made before 2022 could sell and buy the iShares Core U.S. Aggregate Bond ETF( NYSEARCA:AGG ) the same day. The IRS has not decided whether the two funds are substantially identical, so the conservative approach is to wait 30 days before buying BND back in any account and to consult a tax professional.
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Contact editorial@247wallst.com for any questions or corrections.
