Regarding V Tot Bond Mkt I vs Short Term Invest Gr I

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Regarding V Tot Bond Mkt I vs Short Term Invest Gr I

Postby Splais » Thu Apr 04, 2013 9:10 pm

I have been looking at a pert chart that compares Vanguard Total Bond Market Index fund to their Short Term Investment Grade Index fund and I can't find a period before or after the 2008 fall where the short term fund beats the total bond market fund except for the past 8-10 months. Some places they are close, but in many 2 to 3 year periods the TBM is substantially ahead.

Could someone tell me if I am missing something? If not, what has happened in the past year that pushed STIGB fund ahead? thanks.
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Re: Regarding V Tot Bond Mkt I vs Short Term Invest Gr I

Postby grabiner » Thu Apr 04, 2013 11:02 pm

The two funds have different types of risk. Short-Term Investment-Grade holds almost entirely corporate bonds, so it is sensitive to credit risk; Total Bond Market holds a lot of government bonds but has a longer duration, so it is more sensitive to interest-rate risk but less sensitive to credit risk.

Thus, in 2008, when investors didn't trust anyone other than the government, corporate bond prices fell, and Total Bond Market performed much better than all-corporate funds. In 2009, with the recovery in corporate bond prices, Short-Term Investment-Grade did very well.

One reason for the outperformance of Total Bond Market is that interest rates have been falling or steady for a long time. If rates rise significantly, as they did in 1994, short-term bonds will do better (and you can see this if you chart the funds back to inception).

In the long run, I would expect Short-Term Investment-Grade to be slightly less risky, and thus to have lower returns. And bond investors seem to agree; Short-Term Investment-Grade has a 1.17% yield on Admiral shares, while Total Bond Market has a 1.64% yield on Admiral shares.
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Re: Regarding V Tot Bond Mkt I vs Short Term Invest Gr I

Postby Splais » Thu Apr 04, 2013 11:19 pm

Thanks very much
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Re: Regarding V Tot Bond Mkt I vs Short Term Invest Gr I

Postby Munir » Fri Apr 05, 2013 12:34 am

grabiner wrote:The two funds have different types of risk. Short-Term Investment-Grade holds almost entirely corporate bonds, so it is sensitive to credit risk; Total Bond Market holds a lot of government bonds but has a longer duration, so it is more sensitive to interest-rate risk but less sensitive to credit risk.

Thus, in 2008, when investors didn't trust anyone other than the government, corporate bond prices fell, and Total Bond Market performed much better than all-corporate funds. In 2009, with the recovery in corporate bond prices, Short-Term Investment-Grade did very well.

One reason for the outperformance of Total Bond Market is that interest rates have been falling or steady for a long time. If rates rise significantly, as they did in 1994, short-term bonds will do better (and you can see this if you chart the funds back to inception).

In the long run, I would expect Short-Term Investment-Grade to be slightly less risky, and thus to have lower returns. And bond investors seem to agree; Short-Term Investment-Grade has a 1.17% yield on Admiral shares, while Total Bond Market has a 1.64% yield on Admiral shares.



Why is the Short Term Investment Grade doing better YTD than Total Bond Index when interest rates have not changed much during this period- not that such a short period of time means much anyway?
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Re: Regarding V Tot Bond Mkt I vs Short Term Invest Gr I

Postby garlandwhizzer » Fri Apr 05, 2013 1:00 pm

Munir wrote: Why is the Short Term Investment Grade doing better YTD than Total Bond Index when interest rates have not changed much during this period- not that such a short period of time means much anyway?


Because investors fearing the negative effects of rising interest rates on longer duration bonds don't wait for interest rates to rise to shorten the duration of their bond holdings. They often pre-emptively move into shorter duration funds before that event actually happens which is why short term has done much better relative to intermediate term this year as opposed to past years. Much of the loss of principal in longer duration bond funds historically occurs before rate changes as investors anticipate rising interest rates and position themselves for it.

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Re: Regarding V Tot Bond Mkt I vs Short Term Invest Gr I

Postby grabiner » Fri Apr 05, 2013 9:20 pm

garlandwhizzer wrote:[quote="Munir'] wrote: Why is the Short Term Investment Grade doing better YTD than Total Bond Index when interest rates have not changed much during this period- not that such a short period of time means much anyway?[/quote]

Because investors fearing the negative effects of rising interest rates on longer duration bonds don't wait for interest rates to rise to shorten the duration of their bond holdings. They often pre-emptively move into shorter duration funds before that event actually happens which is why short term has done much better relative to intermediate term this year as opposed to past years. Much of the loss of principal in longer duration bond funds historically occurs before rate changes as investors anticipate rising interest rates and position themselves for it.[/quote]


More precisely, there isn't just one "interest rate" which changes. Investors who expect the Federal Funds rate and other short-term rates to rise in 2017 will demand higher yields on bonds which mature after 2017; thus, intermediate-term bond yields will rise. The rise in intermediate-term bond yields (which are the interest rates on intermediate-term bonds) drives down the price of intermediate-term funds.
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