Modern terminal emulators are getting a nifty feature called text reflow. This allows them to break text over several lines dynamically and readjust it when the terminal size is changed. For an example, see finalterm.org Thanks!
Vte-3 does support it, so basically this bug boils down to bug 11207.
Fixed by https://bugzilla.xfce.org/show_bug.cgi?id=11207