Intermediate tax exempt falling?

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jrhinvest
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Intermediate tax exempt falling?

Post by jrhinvest » Mon Dec 17, 2012 7:18 pm

Does anyone have any thoughts on the recent drop in share price of intermediate term tax exempt fund over the last week?
Should this fund still be held for its tax free yield?
Thank you!

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Re: Intermediate tax exempt falling?

Post by Rick Ferri » Mon Dec 17, 2012 7:25 pm

Two reasons:

1) Interest rates have jumped about 0.15% in the past 5 days.
2) Concern over the limitation/elimination of the tax exempt status of municipal bonds going forward

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Re: Intermediate tax exempt falling?

Post by sscritic » Mon Dec 17, 2012 7:31 pm

CA Intermediate TE fell 0.34% today.
IT Investment Grade fell 0.29% today.

That makes interest rates 0.29 and tax fears 0.05. Of course, this is cap gains time; anybody see a distribution? Yes, but not today.

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Re: Intermediate tax exempt falling?

Post by effillus » Mon Dec 17, 2012 7:37 pm

Ouch! How far down is down?

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Re: Intermediate tax exempt falling?

Post by richard » Mon Dec 17, 2012 7:48 pm

effillus wrote:Ouch! How far down is down?
Down is a bad thing if you're planning to sell soon. Down is a good thing for the long-term investor.

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Re: Intermediate tax exempt falling?

Post by jrhinvest » Mon Dec 17, 2012 7:58 pm

effillus wrote:Ouch! How far down is down?
Down .41% today, around 1.25% over the last week.

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Re: Intermediate tax exempt falling?

Post by am » Mon Dec 17, 2012 8:02 pm

How does .15% interest rise result in 1.25% in losses?

I think most of it is tax fears which will likely go through since it is one of the only things both parties agree on. We will see a lot more blood shed in munis.


"Down is a bad thing if you're planning to sell soon. Down is a good thing for the long-term investor."

Sure, but did you invest in taxable or tax free bonds? I do not think bailing out of this investment if it becomes taxable is wrong.

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Re: Intermediate tax exempt falling?

Post by sscritic » Mon Dec 17, 2012 8:05 pm

8 times .15 = 1.20. I wonder what the duration is?

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Re: Intermediate tax exempt falling?

Post by Buddtholomew » Mon Dec 17, 2012 8:08 pm

How realistic is it that tax-exempt muni bonds will lose their favorable tax treatment?
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

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Re: Intermediate tax exempt falling?

Post by Noobvestor » Mon Dec 17, 2012 8:12 pm

Buddtholomew wrote:How realistic is it that tax-exempt muni bonds will lose their favorable tax treatment?
Non-expert opinion: very unlikely. Without going into politics, let me just vaguely say I think there is a long list of other things on the chopping block ahead of this.
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Re: Intermediate tax exempt falling?

Post by Tom_T » Mon Dec 17, 2012 8:14 pm

sscritic wrote:8 times .15 = 1.20. I wonder what the duration is?
:happy

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Re: Intermediate tax exempt falling?

Post by jrhinvest » Mon Dec 17, 2012 8:20 pm

Tom_T wrote:
sscritic wrote:8 times .15 = 1.20. I wonder what the duration is?
:happy
The duration is around 5 or 5.5

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Re: Intermediate tax exempt falling?

Post by Tom_T » Mon Dec 17, 2012 9:22 pm

The price of Intermediate Term Tax Exempt is identical to what it was exactly two months ago. not a big deal IMO.

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Re: Intermediate tax exempt falling?

Post by jjunk » Mon Dec 17, 2012 10:39 pm

Buddtholomew wrote:How realistic is it that tax-exempt muni bonds will lose their favorable tax treatment?
As an investor with a decent amount of money in these funds, hopefully its not likely.

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Re: Intermediate tax exempt falling?

Post by Jerilynn » Mon Dec 17, 2012 11:39 pm

Buddtholomew wrote:How realistic is it that tax-exempt muni bonds will lose their favorable tax treatment?
Depends on who/what you read.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)

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Re: Intermediate tax exempt falling?

Post by Buddtholomew » Tue Dec 18, 2012 9:59 am

Jerilynn wrote:
Buddtholomew wrote:How realistic is it that tax-exempt muni bonds will lose their favorable tax treatment?
Depends on who/what you read.
I would like to hear from the distinguished members of this board. Is there more to the NAV decline than a rise in interest rates over the last week? I am a stay the course investor and do not waiver under pullbacks of this nature as long as the fundamental reason for holding the investment does not change over time (favorable tax treatment).
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

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Re: Intermediate tax exempt falling?

Post by Grt2bOutdoors » Tue Dec 18, 2012 10:01 am

Buddtholomew wrote:
Jerilynn wrote:
Buddtholomew wrote:How realistic is it that tax-exempt muni bonds will lose their favorable tax treatment?
Depends on who/what you read.
I would like to hear from the distinguished members of this board. Is there more to the NAV decline than a rise in interest rates over the last week? I am a stay the course investor and do not waiver under pullbacks of this nature as long as the fundamental reason for holding the investment does not change over time (favorable tax treatment).
I think I'm distinguished. ;-) Fear of the unknown.
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sscritic
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Re: Intermediate tax exempt falling?

Post by sscritic » Tue Dec 18, 2012 10:04 am

Buddtholomew wrote:
I would like to hear from the distinguished members of this board. Is there more to the NAV decline than a rise in interest rates over the last week? I am a stay the course investor and do not waiver under pullbacks of this nature as long as the fundamental reason for holding the investment does not change over time (favorable tax treatment).
Doesn't Rick Ferri count as distinguished? His is the first reply. It has two parts. The first of which is rise in interest rates. Thus the second part is the more you are searching for.

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Re: Intermediate tax exempt falling?

Post by Buddtholomew » Tue Dec 18, 2012 10:27 am

sscritic wrote:
Buddtholomew wrote:
I would like to hear from the distinguished members of this board. Is there more to the NAV decline than a rise in interest rates over the last week? I am a stay the course investor and do not waiver under pullbacks of this nature as long as the fundamental reason for holding the investment does not change over time (favorable tax treatment).
Doesn't Rick Ferri count as distinguished? His is the first reply. It has two parts. The first of which is rise in interest rates. Thus the second part is the more you are searching for.
OK. If working under the premise that explanation 1 and 2 are the drivers for the decline, what do members of this board who invest in muni funds plan to do at this time?
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

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Re: Intermediate tax exempt falling?

Post by livesoft » Tue Dec 18, 2012 10:34 am

Nobody complained about the unheralded rise in VWITX from November 7 to December 7. Where were all the posts titled "Intermediate tax exempt rising for no reason"?

I think the recent drop is partly reversion to the mean. When things go up quickly for no reason, they have a tendency to drop quickly for no reason.

OK, why did they go up? Well, the election made it clear that taxes were going to rise on wealthy folks, so all kinds of articles started to appear about getting into tax-exempt muni funds. When folks stampede into an asset class, the price tends to rise. When they realize what chumps they've been, they sell and the price tends to fall.

PS: Please consider the above statements as coming from just another talking head. :)
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Re: Intermediate tax exempt falling?

Post by Buddtholomew » Tue Dec 18, 2012 11:37 am

livesoft wrote:Nobody complained about the unheralded rise in VWITX from November 7 to December 7. Where were all the posts titled "Intermediate tax exempt rising for no reason"?

I think the recent drop is partly reversion to the mean. When things go up quickly for no reason, they have a tendency to drop quickly for no reason.

OK, why did they go up? Well, the election made it clear that taxes were going to rise on wealthy folks, so all kinds of articles started to appear about getting into tax-exempt muni funds. When folks stampede into an asset class, the price tends to rise. When they realize what chumps they've been, they sell and the price tends to fall.

PS: Please consider the above statements as coming from just another talking head. :)
Why would an investor complain about a rise in NAV? Also, why would you expect to see posts entitled "IT-TE rising for no reason" when you provide reasonable rational for the influx of contributions? Feel free to call us chumps...just don't want my 20% gain to evaporate if munis lose their tax-exempt status.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

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Re: Intermediate tax exempt falling?

Post by Tortoise » Tue Dec 18, 2012 12:08 pm

Buddtholomew wrote:
sscritic wrote:
Buddtholomew wrote:
I would like to hear from the distinguished members of this board. Is there more to the NAV decline than a rise in interest rates over the last week? I am a stay the course investor and do not waiver under pullbacks of this nature as long as the fundamental reason for holding the investment does not change over time (favorable tax treatment).
Doesn't Rick Ferri count as distinguished? His is the first reply. It has two parts. The first of which is rise in interest rates. Thus the second part is the more you are searching for.
OK. If working under the premise that explanation 1 and 2 are the drivers for the decline, what do members of this board who invest in muni funds plan to do at this time?
Nothing. As Jack Bogle has said many times, "Don't do something, stand there!" :happy
"Always do right. This will gratify some people, and astonish the rest." --Mark Twain

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Re: Intermediate tax exempt falling?

Post by dickenjb » Tue Dec 18, 2012 2:40 pm

I bought $107,000 worth in taxable on 10/22/12. Vanguard is showing I have a $3.55 short term capital loss. Wow, the volatility is killing me. Guess I will need an ambien to sleep tonight.

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Re: Intermediate tax exempt falling?

Post by am » Tue Dec 18, 2012 2:49 pm

"I bought $107,000 worth in taxable on 10/22/12. Vanguard is showing I have a $3.55 short term capital loss. Wow, the volatility is killing me. Guess I will need an ambien to sleep tonight."

Missing the point. Your 107k will go down stock crash style if/when these bonds lose tax exempt status. The investment may be fundamentally different from what you bought.

I also dislike that this investment is constantly on the chopping block for losing tax exempt status. Think I am done with this one. Do not need the income stream at all in taxable.
Last edited by am on Tue Dec 18, 2012 3:22 pm, edited 1 time in total.

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Re: Intermediate tax exempt falling?

Post by Buddtholomew » Tue Dec 18, 2012 2:50 pm

dickenjb wrote:I bought $107,000 worth in taxable on 10/22/12. Vanguard is showing I have a $3.55 short term capital loss. Wow, the volatility is killing me. Guess I will need an ambien to sleep tonight.
You should have looked at your balance a week ago. Personally, I am not overly concerned with the magnitude of the recent decline as I am with the reason behind the drop. Is it falling as a result of rising interest rates (known) or the possibility of the fund losing tax-exempt status (unknown). I realize that no one can answer this question and each investor will have to weigh the pros and cons of staying in the investment for themselves.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

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Re: Intermediate tax exempt falling?

Post by Buddtholomew » Tue Dec 18, 2012 8:00 pm

Tortoise wrote:
Buddtholomew wrote:
sscritic wrote:
Buddtholomew wrote:
I would like to hear from the distinguished members of this board. Is there more to the NAV decline than a rise in interest rates over the last week? I am a stay the course investor and do not waiver under pullbacks of this nature as long as the fundamental reason for holding the investment does not change over time (favorable tax treatment).
Doesn't Rick Ferri count as distinguished? His is the first reply. It has two parts. The first of which is rise in interest rates. Thus the second part is the more you are searching for.
OK. If working under the premise that explanation 1 and 2 are the drivers for the decline, what do members of this board who invest in muni funds plan to do at this time?
Nothing. As Jack Bogle has said many times, "Don't do something, stand there!" :happy
This is really bothersome. I don't want to sell and search for a suitable replacement. Is the writing on the wall and we are choosing to ignore it? This holding is my 2nd tier EF.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

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Re: Intermediate tax exempt falling?

Post by baw703916 » Tue Dec 18, 2012 8:18 pm

I'm not worried. Maybe if the NAV drops enough it will be a buying opportunity.
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Re: Intermediate tax exempt falling?

Post by Joe S. » Tue Dec 18, 2012 8:50 pm

jrhinvest wrote:Does anyone have any thoughts on the recent drop in share price of intermediate term tax exempt fund over the last week?
Should this fund still be held for its tax free yield?
Thank you!
You'll be happy to know that even though the price has dropped from $14.52 to 14.35, the yield has risen from 1.39% to 1.42%. So if you like the tax free yield, it has increased. If the price drops more, your yield will rise even higher...

12/12/2012 $14.52 1.39%
12/13/2012 $14.48 1.40%
12/14/2012 $14.46 1.40%
12/17/2012 $14.40 1.41%
12/18/2012 $14.35 1.42%
https://personal.vanguard.com/us/funds/ ... &year=#res

The truth of the matter is that bond prices are very hard to predict, and none of us know what prices will do in the future.

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Re: Intermediate tax exempt falling?

Post by Rainier » Tue Dec 18, 2012 9:52 pm

Buddtholomew wrote: This is really bothersome. I don't want to sell and search for a suitable replacement. Is the writing on the wall and we are choosing to ignore it? This holding is my 2nd tier EF.
Are you down to 59 days worth of expenses covered instead of 60? It's muni bonds, not cash, isn't that why it is your 2nd tier.

I'm always adding to my holdings so I like it when things go on sale.

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Re: Intermediate tax exempt falling?

Post by abuss368 » Wed Dec 19, 2012 10:43 am

I plan to stay the course.
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Re: Intermediate tax exempt falling?

Post by dickenjb » Wed Dec 19, 2012 11:12 am

Oh my. Muni bonds might lose their tax free status? Will I be protected if I don a tinfoil hat? Will it be after or before the end of the world according to the Mayans? And are the Black Helicopters really coming?

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Re: Intermediate tax exempt falling?

Post by neurosphere » Wed Dec 19, 2012 11:47 am

Buddtholomew wrote:The concern is whether tax exempt bonds will lose their favorable tax treatment and the impact of this decision on the holding.
I feel that many are indeed concerned that munis may lose tax exempt status. And thus, many have likely sold off some muni holdings expecting that if/when announced/decided, the NAVs will go down. On the other hand, that risk is now baked into the price. So come Jan 1st if munis KEEP their tax exempt status, there may well be a RISE in NAV, as people feel comfortable to buy back in.

So if you sell munis now in fear of a change in status, you risk losing any potential "pop", as well as any extra tax-free yield you give up by shifting your money somewhere else in the interim.

If you DON'T sell munis now, then perhaps you do lose money if the tax status changes.

Then there are intermediate cases, i.e. it may not change all or no or all at once. Perhaps they announce that only NEWLY issued munis lose the tax exempt status. So bond funds with EXISTING bonds are still tax free. Those funds may actually see a large rise in NAV, as suddenly they are in greater demand than other things out there.

The point is, no one can assign probabilities to those scenarios. And fewer still can reliable predict all the implications. Thus, the advice you have been given, over and again, to just hold tight. Doing ANYTHING is as likely to be harmful as it is to be beneficial. And given that changes to the tax-status of munis seems unlikely (but who knows?), stop stressing.
Buddtholomew wrote:Why would an investor complain about a rise in NAV?
You have already provided your own answer to this question. You complained about a drop in NAV if it's due to fundamental changes in why you hold the investment. Well, shouldn't a RISE in NAV (if due to fundamental changes) ALSO cause concern? Of course I would rather my NAV increase rather than decrease. But in that case I would sell prior to any subsequent decline again and get out of an investment which was no longer performing as expected.

So perhaps complain is not the right word. But we have been hearing "complaints" about bond fund rises in NAV for years as in "While I'm happy that my bond funds have made money in the past [x,y,z number of months/years], I'm concerned this is not sustainable, nor do I fully understand why they have increased so much more than I may have previously thought possible. Perhaps I should get out of an investment I don't fully understand before things go the other way?"

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Re: Intermediate tax exempt falling?

Post by Sidney » Wed Dec 19, 2012 11:54 am

We continue to hold a blend of intermediate and limited term tax exempt funds, weighted toward limited term. I see no reason to change my mix. Most of these funds will not be tapped any time soon.
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Re: Intermediate tax exempt falling?

Post by ascenzm » Wed Dec 19, 2012 11:56 am

jrhinvest wrote:Does anyone have any thoughts on the recent drop in share price of intermediate term tax exempt fund over the last week?
Should this fund still be held for its tax free yield?
Thank you!

What does your IPS say? I don't have a crystal ball, but my IPS says to hold my Vanguard Intermediate Term Tax Exempt fund shares. At the current NAV, I will not be adding any additional shares.

Mike
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Re: Intermediate tax exempt falling?

Post by david9117 » Wed Dec 19, 2012 11:58 am

Wouldn't the loss of tax exempt status be already baked into the current prices. Then it means selling now is not very useful. Unless one has info which the markets are not aware off....

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Re: Intermediate tax exempt falling?

Post by LadyGeek » Wed Dec 19, 2012 5:35 pm

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Re: Intermediate tax exempt falling?

Post by linguini » Wed Dec 19, 2012 6:33 pm

Just to root out any misconceptions, all proposals within the last few years for eliminating or reducing the tax deduction for income from municipal bonds are for eliminating the issuance of tax-exempt municipal bonds; there is almost no chance that previously issued (ie, currently available) tax-exempt municipal bonds will suddenly become 100% taxable bonds. The one exception is that a few proposals from Barack Obama (eg, the proposed American Jobs Act) would have limited all federal tax deductions to a maximum of 28% instead of the highest earned income bracket, and verbal proposals from Mitt Romney and some congressional Republicans would have capped total value of federal tax deductions. It is plausible that one or both of these mechanisms for deficit reduction could appear in legislation over the next year, but:
a) It is not clear how or whether such proposals would affect income from tax-exempt munis.
b) Such proposals would almost definitely have small or no tax effects on most bogleheads.
c) Any speculation about such proposals to change tax exempt munis is still entirely speculation, with no strong evidence one way or the other. While it's OK to take reasonable steps to protect ourselves from future changes to tax law (eg, we have no idea what the tax status of dividends will be next year), making asset allocation changes as part of some micro-optimizing tax strategy based on wild speculation about future legislation is a reactionary strategy that goes strongly against boglehead principles.

Just keep your tax-exempt munis, and don't worry about the price because the change in interest rate will fully compensate you for the price change as long as you hold them to term.

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Re: Intermediate tax exempt falling?

Post by richard » Wed Dec 19, 2012 6:58 pm

livesoft wrote:Nobody complained about the unheralded rise in VWITX from November 7 to December 7. Where were all the posts titled "Intermediate tax exempt rising for no reason"?
The complaint would be "Intermediate tax exempt yield dropping for no reason"

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Re: Intermediate tax exempt falling?

Post by richard » Wed Dec 19, 2012 7:02 pm

linguini wrote:Just keep your tax-exempt munis, and don't worry about the price because the change in interest rate will fully compensate you for the price change as long as you hold them to term.
A drop in price helps the long-term investor (one who reinvests cash flow), but almost no one believes that.

A limit on deductions shouldn't matter for munis, as they are not taxable income rather than being income offset by a deduction. Increases in tax rates should increase muni prices and reduce yields. As you say, it's all speculation.

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Re: Intermediate tax exempt falling?

Post by linguini » Wed Dec 19, 2012 7:14 pm

richard wrote:
linguini wrote:Just keep your tax-exempt munis, and don't worry about the price because the change in interest rate will fully compensate you for the price change as long as you hold them to term.
A drop in price helps the long-term investor (one who reinvests cash flow), but almost no one believes that.
I believe it! :D Or rather, I figure that because I have a long investment horizon, interest rate changes don't affect how much money my previously bought bonds will accumulate, and will only affect future bond purchases, so interest rate increases are the perfect time to rebalance from stocks to bonds. :)
A limit on deductions shouldn't matter for munis, as they are not taxable income rather than being income offset by a deduction. Increases in tax rates should increase muni prices and reduce yields. As you say, it's all speculation.
Agreed 100%. I see no reason to change asset allocation based on what we currently know, if for no other reason that that what we know amounts to very little.

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Re: Intermediate tax exempt falling?

Post by dickenjb » Thu Jan 17, 2013 8:23 am

Joe S. wrote:
jrhinvest wrote:Does anyone have any thoughts on the recent drop in share price of intermediate term tax exempt fund over the last week?
Should this fund still be held for its tax free yield?
Thank you!
You'll be happy to know that even though the price has dropped from $14.52 to 14.35, the yield has risen from 1.39% to 1.42%. So if you like the tax free yield, it has increased. If the price drops more, your yield will rise even higher...

12/12/2012 $14.52 1.39%
12/13/2012 $14.48 1.40%
12/14/2012 $14.46 1.40%
12/17/2012 $14.40 1.41%
12/18/2012 $14.35 1.42%
https://personal.vanguard.com/us/funds/ ... &year=#res

The truth of the matter is that bond prices are very hard to predict, and none of us know what prices will do in the future.
And yesterday the share price was back to $14.48. Much ado about nothing.

What have we demonstrated here, ladies and gentleman?

That is right, intermediate bond fund NAV's FLUCTUATE.

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