Bond bubble + Bnd total bond 80 percent turnover?

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Bond bubble + Bnd total bond 80 percent turnover?

Postby LH » Fri May 10, 2013 10:50 am

I was looking at the turnover of bnd etf vanguard aggregate bond fund and it stated it had 80% annual turnover?

http://finance.yahoo.com/q/pr?s=BND

Which seems high given its medium duration?

reason I was looking, and then asking, is that the whole thing with

"interest rates will rise, and bonds (bond funds) are not safe/not safe as you think/in a bubble"

that I just keep reading repeatedly, or at least seeing the headlines of articles, is that I just do not get how its going to be all that bad for a buy and hold investor.

Yeah, BND would fall, but then BND is going to be buying the new bonds, with money obtained from turnover of expiring bonds, those new bonds would have the higher interest rate.

Yeah, BND would have to sell prematurely, some bonds to investors who want to sell BND low, and get out, but I do not see how that is going to really affect me much. In the same way in a stock fund, when prices tanked in 2008, people sold out of VTI (vanguard TSM) at the low, yeah sure maybe some increase transactional cost, but the ETF effectively only sell out the shares that the person selling VTI basically owns.

I would seem to come out in the wash to me.

I just really fail to see the bated breath everyone has for the increase in interest rates, for an accumulator. Now for a decumulator, different thing I would expect.

But 80 percent annual turnover?

Seems high. If turnover is that fast, and interest rates move up slowly, so what? The bnd etf is turning over bonds with low interest rates and buying new ones with higher interest rates (if rates are going up at that time), at a rate of 80 percent a year? Its hard to me to get a feel for anything bursting in bnd.
Last edited by LH on Fri May 10, 2013 11:29 am, edited 3 times in total.
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Re: Bnd vanguard total bond 80 percent turnover?

Postby G-Money » Fri May 10, 2013 11:13 am

Just a guess, but all of the bonds with maturity of less than 1 year will be "turned over" each year. In the case of very-short term bonds (think T-Bills), they could mature several times during the course of a year.

I don't think it's because Vanguard is jumping into and out of particular bond securities, but I haven't done the digging to confirm. So my guess is that most of the securities in TBM with maturity >1 year are not being churned, but all the really short stuff cycles through a lot.
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby rkhusky » Fri May 10, 2013 11:33 am

Morningstar says that average turnover for the category is 229%, so 80% seems rather small. Wonder if that is 80% of the bonds are turned over or 80% of the value in the fund is turned over?
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby DaveS » Sat May 11, 2013 8:02 am

The problem isn't the fund it's the index. The idea of the agg. bond index is to create a statistically accurate reflection of the bond market. If they have a 30 year bond one year, the next year you would think it would be the 29 year bond. No, they sell it and replace it with a more statistically correct 29 year bond. Then the next year they sell that and get a statistically perfect 28 year bond. So the turnover is fairly high. On the other hand brokerage commissions are not high these days with computerized trading, and bonds don't generate a lot of short term capital gains. So the turnover is not that important. Dave
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby G-Money » Sat May 11, 2013 9:35 am

DaveS,

I've never heard that before. Do you have a source?
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby DaveS » Sat May 11, 2013 6:33 pm

My source is that i have owned TBM for years and periodically glance at the holdings. Dave
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby LH » Sat May 11, 2013 10:28 pm

DaveS wrote:The problem isn't the fund it's the index. The idea of the agg. bond index is to create a statistically accurate reflection of the bond market. If they have a 30 year bond one year, the next year you would think it would be the 29 year bond. No, they sell it and replace it with a more statistically correct 29 year bond. Then the next year they sell that and get a statistically perfect 28 year bond. So the turnover is fairly high. On the other hand brokerage commissions are not high these days with computerized trading, and bonds don't generate a lot of short term capital gains. So the turnover is not that important. Dave


Wow

Would not have imagined that, interesting.
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby G-Money » Sat May 11, 2013 11:38 pm

Given that TBM owns more than half the bonds in the index, I have my doubts that TBM actually operated that way. But since I don't have any other information to refute it, I'll defer to others.
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby DaveS » Sun May 12, 2013 9:54 am

I defiantly am not criticizing the fund which I happen to hold. About 7 years ago Total Bond held commercial paper with maturities as short as 90 days and their turnover was more than 100%. Now they don't buy anything with a maturity shorter than a year. Once you understand the reason for it, the turnover is not harmful. Dave
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby nedsaid » Sun May 12, 2013 10:25 am

This is an interesting discussion. I used to scratch my head and wonder the same thing. My "conservative" bond fund had turnover that looked huge to me. Naively, I thought a bond portfolio might turn over 20% to 50%. So this answered a question that I always wondered about.

Another factor would be shareholder purchases and redemptions. This would also cause turnover.

Thanks everyone for the education. Bogleheads are awesome!!
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby Geologist » Sun May 12, 2013 4:24 pm

If you read the Annual Report (I always recommend doing so), you will see that of the 80% turnover for 2012, 49% was attributable to "mortgage-dollar roll activity." So, the base turnover was only 31%. My recollection is that mortgage dollar role activity was only included in turnover in relatively recent years.

There is a whole paragraph (A3) in the Notes to Financial Statements explaining mortgage dollar rolls. Download the Annual Report if you want to find out, as I won't repeat it here.
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby LH » Tue May 14, 2013 3:15 pm

Geologist wrote:If you read the Annual Report (I always recommend doing so), you will see that of the 80% turnover for 2012, 49% was attributable to "mortgage-dollar roll activity." So, the base turnover was only 31%. My recollection is that mortgage dollar role activity was only included in turnover in relatively recent years.

There is a whole paragraph (A3) in the Notes to Financial Statements explaining mortgage dollar rolls. Download the Annual Report if you want to find out, as I won't repeat it here.



50 percent mortgage dollar roll activity, hmmm. you have a link?

thanks,

LH
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Re: Bond bubble + Bnd total bond 80 percent turnover?

Postby Geologist » Tue May 14, 2013 6:32 pm

Go to https://personal.vanguard.com/us/funds/ ... IntExt=INT

Click on "View prospectuses and reports" and download the Dec 31, 2012 annual report.
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