Have A-rated int corporate bonds ever defaulted >1.4%?

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Have A-rated int corporate bonds ever defaulted >1.4%?

Postby jmk » Thu May 02, 2013 6:58 pm

The "default premium" on the yield of the Intermediate corporate bond fund is about 1.39% above the intermediate treasury fund.
Has there ever been a period where a bonds portfolio with only 20% below A3 (VFICX) has defaulted enough to even come close to that? Even during the depression A rated bonds didn't default much, right?
Last edited by jmk on Thu May 02, 2013 10:04 pm, edited 1 time in total.
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Re: Have A-rated int corporate bonds ever defaulted >1.4%?

Postby G-Money » Thu May 02, 2013 7:19 pm

The problem is that when an A rated bond is downgraded, it has less room to go before its sub-investment grade.

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Re: Have A-rated int corporate bonds ever defaulted >1.4%?

Postby OverTheHill » Thu May 02, 2013 7:24 pm

I don't think there's ever been a default in the history of the fund. Interestingly, I don't think there's ever been a default of the High Yield corp fund either.
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Re: Have A-rated int corporate bonds ever defaulted >1.4%?

Postby LFKB » Thu May 02, 2013 7:55 pm

OverTheHill wrote:I don't think there's ever been a default in the history of the fund. Interestingly, I don't think there's ever been a default of the High Yield corp fund either.


There has never been a default on Vanguard High-Yield Corporate? That would be very impressive considering it has been around since 1978.
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Re: Have A-rated int corporate bonds ever defaulted >1.4%?

Postby G-Money » Thu May 02, 2013 7:58 pm

OverTheHill wrote:I don't think there's ever been a default in the history of the fund. Interestingly, I don't think there's ever been a default of the High Yield corp fund either.

I doubt this. Check out the annual statement and search "security in default". You'll see a foot it's in the short term investment grade fund (associated with a Lehman bond). Similarly, in the bond index funds annual statement, you'll find the same footnote associated with Enron holdings. Even the granddaddy of them all, TBM, discloses it still holds some Enron bonds which are "in default." So either Vanguard is buying defaulted securities in its investment grade funds (extremely unlikely), or these holdings defaulted while Vanguard was holding them (much more likely). Granted, these are not sizable holdings in these funds, but it is untrue to say it "never" happened.

Two more points. First, these annual statements are only reflective of he holdings in the funds as of the close of the funds' fiscal year. If Vanguard unloaded defaulted securities even one day before the "as of" date, they would not appear in the annual statements. Second, if a holding merely goes from investment grade to junk status before Vanguard unloads it (without waiting for it to default), it will still be selling the security at a substantial loss. It would be "buying high and selling low." So even if Vanguard could actually claim that none of its holdings ever defaulted, that would NOT be the same as claiming that the fund never suffered a loss due to credit risk showing up.
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Re: Have A-rated int corporate bonds ever defaulted >1.4%?

Postby grabiner » Thu May 02, 2013 9:29 pm

The issue isn't that the bonds defaulted, but that the risk of default reduces their prices. The fund lost 13% of its value in two months, September-October 2008, just when the rest of your portfolio also lost a lot of its value. With the recovery, it made up the loss by June 2009; if the fund had been around in the Great Depression, it probably would have been hit badly by defaults.

That doesn't make Intermediate-Term Investment-Grade a bad fund; you just have to be aware that it is a bit riskier than most bond funds because it holds so few government bonds. The fund has an 18th-percentile rating over the last 10 years from M*, but it was below average in 2008; both of those are indications of a fund with low costs but higher risk than most of its peers. Conversely, Total Bond Market, which holds a lot of government bonds was 50th-percentile over the last 10 years, but was 10th-percentile in 2008, gaining 5% when the average fund lost 5%; both of those are indications of a fund with low costs and lower risk than most of its peers.
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Re: Have A-rated int corporate bonds ever defaulted >1.4%?

Postby Valuethinker » Fri May 03, 2013 7:58 am

jkandell wrote:The "default premium" on the yield of the Intermediate corporate bond fund is about 1.39% above the intermediate treasury fund.
Has there ever been a period where a bonds portfolio with only 20% below A3 (VFICX) has defaulted enough to even come close to that? Even during the depression A rated bonds didn't default much, right?


Just on default rates.

It is default rate - expected recovery in defaults

Altman however shows you they are negatively correlated (recovery of creditors *falls* in the same economic conditions that brings higher default rates).

Note with an IG bond fund, it sells bonds that are downgraded below BBB-. So they seldom have defaulted bonds, because they have sold out.

VG got caught with big weightings in telecoms bonds in 2000-01 as I recall, hitting the performance of their funds. Worldcom, Nortel etc. defaulted. They have since put in more rigorous risk control policies I believe.
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Re: Have A-rated int corporate bonds ever defaulted >1.4%?

Postby OverTheHill » Fri May 03, 2013 10:23 am

I stand corrected regarding the absence of defaults with Vanguard. It seemed to good to be true, but I now understand what they chart really means. Of course, Vanguard High Yield is still one of the top rated high yield funds around, so that's good to know.
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