Still lose with bonds even at duration

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stocknoob4111
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Still lose with bonds even at duration

Post by stocknoob4111 » Wed Feb 21, 2018 9:23 pm

Was just doing some calculations, I own 11,100 shares of VBTLX that I picked up at 10.69 with yield 2.61%. Total cost was $118,659. Current price is 10.45 @ 2.91% or $115,995 for a current loss of $2,664.

If I wait 6 years and assuming interest rates stay *exactly* where they are I thought i'd compare my current situation vs where I would've been when I bought:

Original:
$118,659 @ 2.61% compounded over 6 years: $138,751, interest paid: $16,958, taxes paid at 33% marginal: $5596, Net: $133,155

Current:
$115,995 @ 2.91% compounded over 6 years: $138,094, interest paid: $18,678, taxes: $6,164, Net: $131,930

Net loss: $1,225 over 6 years

And this is IF interest rates don't go up anymore at all which is highly doubtful.

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arcticpineapplecorp.
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Re: Still lose with bonds even at duration

Post by arcticpineapplecorp. » Wed Feb 21, 2018 9:32 pm

perhaps you should read this post, by nisiprius:

viewtopic.php?t=232550#p3623854

and this expansion by lack_ey on that issue from that same post:

viewtopic.php?f=10&t=232550&start=150#p3715772
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Re: Still lose with bonds even at duration

Post by stlutz » Wed Feb 21, 2018 9:36 pm

Two notes:

1) I think your tax calculation on your "current" line is incorrect. Don't forget that you can take a capital loss at any time ("tax loss harvesting") and deduct that against regular income. So, the two options should be very close to equal tax-wise.

2) SEC Yield is based on a 30 day average, which means that it sometime takes a little while to fully catch up when there is a move in rates. The price change you've experienced would be more consistent with about a .4% increase in rates as opposed to just .3%. Not a big difference, but that does come into play when you're trying to figure out a .6% return difference over 6 years.

visualguy
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Re: Still lose with bonds even at duration

Post by visualguy » Wed Feb 21, 2018 10:09 pm

Indeed, the SEC yield calculation may be part of it.

Regardless, the more worrying thing is what happens if interest rates go up additional times during those 6 years, so you get additional big drops in NAV because the duration of the fund stays at 6 years, and doesn't shrink as you hold the fund. Even after, say, 5 years of holding the fund, an additional 1% rise in interest rate will drop your NAV by 6%, hurting the return you expected when buying the fund 5 years earlier. Seems like an inferior investment in a rising interest rate environment when compared to CDs.

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Re: Still lose with bonds even at duration

Post by livesoft » Wed Feb 21, 2018 10:11 pm

Did you write that you have VBTLX in a taxable account and that you are in a high marginal income tax bracket?
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Elysium
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Re: Still lose with bonds even at duration

Post by Elysium » Wed Feb 21, 2018 10:33 pm

visualguy wrote:
Wed Feb 21, 2018 10:09 pm
Indeed, the SEC yield calculation may be part of it.

Regardless, the more worrying thing is what happens if interest rates go up additional times during those 6 years, so you get additional big drops in NAV because the duration of the fund stays at 6 years, and doesn't shrink as you hold the fund. Even after, say, 5 years of holding the fund, an additional 1% rise in interest rate will drop your NAV by 6%, hurting the return you expected when buying the fund 5 years earlier. Seems like an inferior investment in a rising interest rate environment when compared to CDs.
Surely, sounds that simple. If only the crystall ball is clear on when that rising rate environment is starting and ending. I should know this, since I have been sitting in stable value since 2014 or so with the conviction that rising rate environment is starting anytime, and gave up extra bond returns over the last few years.

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Re: Still lose with bonds even at duration

Post by pkcrafter » Wed Feb 21, 2018 10:51 pm

stocknoob4111 wrote:
Wed Feb 21, 2018 9:23 pm
Was just doing some calculations, I own 11,100 shares of VBTLX that I picked up at 10.69 with yield 2.61%. Total cost was $118,659. Current price is 10.45 @ 2.91% or $115,995 for a current loss of $2,664.

If I wait 6 years and assuming interest rates stay *exactly* where they are I thought i'd compare my current situation vs where I would've been when I bought:

Original:
$118,659 @ 2.61% compounded over 6 years: $138,751, interest paid: $16,958, taxes paid at 33% marginal: $5596, Net: $133,155

Current:
$115,995 @ 2.91% compounded over 6 years: $138,094, interest paid: $18,678, taxes: $6,164, Net: $131,930

Net loss: $1,225 over 6 years

And this is IF interest rates don't go up anymore at all which is highly doubtful.
You have just demonstrated why you should not hold taxable bonds in taxable when you're in the 33% tax bracket.

http://performance.morningstar.com/fund ... ture=en_US

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Re: Still lose with bonds even at duration

Post by visualguy » Wed Feb 21, 2018 11:07 pm

Dieharder wrote:
Wed Feb 21, 2018 10:33 pm
Surely, sounds that simple. If only the crystall ball is clear on when that rising rate environment is starting and ending. I should know this, since I have been sitting in stable value since 2014 or so with the conviction that rising rate environment is starting anytime, and gave up extra bond returns over the last few years.
That would depend on how much your stable value fund was paying... If not much, some 401k plans have the option of going with brokered CDs.

Regarding the rising rate environment... What's a reasonable scenario where you would be better off with the bond funds vs CDs? Declining rate environment?

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Re: Still lose with bonds even at duration

Post by visualguy » Wed Feb 21, 2018 11:17 pm

pkcrafter wrote:
Wed Feb 21, 2018 10:51 pm
You have just demonstrated why you should not hold taxable bonds in taxable when you're in the 33% tax bracket.

http://performance.morningstar.com/fund ... ture=en_US

Paul
What's the alternative if you're out of space in tax-deferred? Put everything in munis? That may be too much in munis...

stocknoob4111
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Re: Still lose with bonds even at duration

Post by stocknoob4111 » Wed Feb 21, 2018 11:23 pm

So, is my case a good situation to Tax Loss Harvest? Say, I sell these bonds and take a loss of $2,600... I can apply this loss to my ordinary income and get 33% back? So, in this situation I decrease my "losses" from $2,600 to $1,742. Then I can wait 30 days to avoid wash sale rules and pickup VBTLX again for possibly even cheaper.

Opinions on the above strategy? Since my rate of 33% comes from 24% Fed + 9% California State, is TLH allowed at the CA state level as well or only Federal?

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Re: Still lose with bonds even at duration

Post by Noobvestor » Wed Feb 21, 2018 11:55 pm

visualguy wrote:
Wed Feb 21, 2018 11:17 pm
pkcrafter wrote:
Wed Feb 21, 2018 10:51 pm
You have just demonstrated why you should not hold taxable bonds in taxable when you're in the 33% tax bracket.

http://performance.morningstar.com/fund ... ture=en_US

Paul
What's the alternative if you're out of space in tax-deferred? Put everything in munis? That may be too much in munis...
In part, I use Treasuries, which are at least state-tax exempt. Until recently, I held munis too, but yields are down. I and EE Bonds are both tax-deferred. I Bonds you can cash out anytime over the next 30 years (say, in a low-tax year after retiring but before RMDs). EEs double over 20 years. Both are state-tax exempt. You can buy a total of $10,000 per type per person per year (so $20K total if single, $40K for a married couple).
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Re: Still lose with bonds even at duration

Post by Noobvestor » Thu Feb 22, 2018 12:00 am

stocknoob4111 wrote:
Wed Feb 21, 2018 11:23 pm
So, is my case a good situation to Tax Loss Harvest? Say, I sell these bonds and take a loss of $2,600... I can apply this loss to my ordinary income and get 33% back? So, in this situation I decrease my "losses" from $2,600 to $1,742. Then I can wait 30 days to avoid wash sale rules and pickup VBTLX again for possibly even cheaper.

Opinions on the above strategy? Since my rate of 33% comes from 24% Fed + 9% California State, is TLH allowed at the CA state level as well or only Federal?
I would suggest TLHing to something like Vanguard Intermediate-Term Tax-Exempt or Intermediate-Term Treasuries. Whether you want to buy back into a tax-inefficient fund (like VBTLX) after 30 days or at all is another question, but I wouldn't do it personally. With Tax-Exempt, you get a federal tax exemption. With Treasuries, you get more safety and a state tax exemption but slightly lower yield. I prefer the latter currently.
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Re: Still lose with bonds even at duration

Post by mega317 » Thu Feb 22, 2018 12:15 am

stocknoob4111 wrote:
Wed Feb 21, 2018 11:23 pm
is TLH allowed at the CA state level as well or only Federal?
Yes. It will be the same capital loss from line 13 of your 1040.

There are a few fringe differences, adjustments to that number, that I don't really know much about. But you will of course read the CA 540 booklet before attempting anything that will significantly affect your return.

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Re: Still lose with bonds even at duration

Post by Tyler Aspect » Thu Feb 22, 2018 12:40 am

The original poster is not taking account of the bond fund's underlying bonds' net asset value climbing back toward par at maturity.

I have in my taxable account a bit of US Treasury Bill that does not pay interests. I can see its net asset value dropping during the last few months as short term yields have increased. Its target maturity date is in April, and I can already observing its net asset value now climbing toward par even though short term yields continues to rise.
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Re: Still lose with bonds even at duration

Post by ogd » Thu Feb 22, 2018 11:28 am

stocknoob4111 wrote:
Wed Feb 21, 2018 9:23 pm
Current:
$115,995 @ 2.91% compounded over 6 years: $138,094, interest paid: $18,678, taxes: $6,164, Net: $131,930

Net loss: $1,225 over 6 years
Hi stocknoob4111 -- as I was mentioning in another thread, you need to be a little patient when it comes to SEC yield. Since it's a 30-day average, it's incorporating late January bond yields which were significantly lower.

Even absent any market yield increases (/ price declines), it should continue to steadily climb for a couple of weeks, as the "last 30 days" match the present more and more. This effect can be clearly seen in the stable period before yesterday's decline -- yield climbing without price declines.

02/14/2018 $10.47 2.84%
02/15/2018 $10.48 2.86%
02/16/2018 $10.49 2.87%
02/20/2018 $10.48 2.90%

I estimate that if market yields stop moving entirely, the fund's yield will stabilize a few bp above 3%. This is the yield that you currently own, althought there's no easy way to see it. 3% and adjusting the duration to the precise 6.11 years makes your math work, pre-taxes.

Post-taxes: you shouldn't assume that the fund returns everything as interest. Part of the yield might be delivered as capital gain, typically matching an earlier decline. While over the long term a bond fund distributes pretty much all of its returns, over the short term that's not necessarily true and it might return capital gains that you can defer as you wish. (Btw: the reasons why it can't do that more are complicated and has to do with tax law; in my limited understanding -- the fund essentially have to distribute the yield that it bought. If bonds depreciate along the way, the fund can distribute less than the yield and take the rest as capital gain. But it can't buy already depreciated bonds to get this -- they have higher yields already -- , so cap gains only show up following declines in the existing portfolio. This is similar to how individual bond buyers are taxed, though probably a lot more complicated).

But the larger question is -- why not munis in a 33% taxable account?? With those, you do get the proper rewards from larger yields despite taxes.
stocknoob4111 wrote:
Wed Feb 21, 2018 9:23 pm
And this is IF interest rates don't go up anymore at all which is highly doubtful.
Well, if you believe that you should immediatelly sell all your bonds, wait for the much larger yields, thumbing your nose at all those bond market traders who believe today's prices/yields are fair, bases on the simple premise that if a graph starts increasing, it will keep increasing... Kidding of course, don't do that. Nobody knows. If the market thought 6-year bond yields should be higher, they would be higher as we speak.
Tyler Aspect wrote:
Thu Feb 22, 2018 12:40 am
The original poster is not taking account of the bond fund's underlying bonds' net asset value climbing back toward par at maturity.
He mostly did account for this by using the SEC yield. It incorporates that effect. "mostly" because of the tax issue that I mention -- a part of the yield will likely show up as capital gains, and it's because of bonds recovering to par.

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Re: Still lose with bonds even at duration

Post by Dazed&Confused » Thu Feb 22, 2018 11:43 am

stocknoob4111 wrote:
Wed Feb 21, 2018 9:23 pm
Was just doing some calculations, I own 11,100 shares of VBTLX that I picked up at 10.69 with yield 2.61%. Total cost was $118,659. Current price is 10.45 @ 2.91% or $115,995 for a current loss of $2,664.

If I wait 6 years and assuming interest rates stay *exactly* where they are I thought i'd compare my current situation vs where I would've been when I bought:

Original:
$118,659 @ 2.61% compounded over 6 years: $138,751, interest paid: $16,958, taxes paid at 33% marginal: $5596, Net: $133,155

Current:
$115,995 @ 2.91% compounded over 6 years: $138,094, interest paid: $18,678, taxes: $6,164, Net: $131,930

Net loss: $1,225 over 6 years

And this is IF interest rates don't go up anymore at all which is highly doubtful.
Stocknoob4111 can you tell me how you arrived at the $16958 interest in your Original example?
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Re: Still lose with bonds even at duration

Post by Elysium » Fri Feb 23, 2018 9:28 am

visualguy wrote:
Wed Feb 21, 2018 11:07 pm
Dieharder wrote:
Wed Feb 21, 2018 10:33 pm
Surely, sounds that simple. If only the crystall ball is clear on when that rising rate environment is starting and ending. I should know this, since I have been sitting in stable value since 2014 or so with the conviction that rising rate environment is starting anytime, and gave up extra bond returns over the last few years.
That would depend on how much your stable value fund was paying... If not much, some 401k plans have the option of going with brokered CDs.

Regarding the rising rate environment... What's a reasonable scenario where you would be better off with the bond funds vs CDs? Declining rate environment?
The point is, unless someone has a crystal ball that tell them exactly when rates are going to rise and when they will stop rising, there is no way to stay out of bonds and into stable value / CDs without risking either losing additional bond returns, or accepting lower returns in a rising rate environment. You are either too early to get out of bond market and into stable value / CDs, in which case you lose additional bond returns, or you are late which means rates have already began to rise and you already have lost principal and getting out now would mean locking in those losses, and instead it is better to stay and get the extra income to offset the losses. The third option is to accept that stable value / CD rates are acceptable even if bonds are providing additional income, you would rather take the reliable published albeit slightly lower rates than risk losing in anticipation of a rising rate environment. The fact is no one actually knows how to time bond maket successfully, it is even more harder than timing stock market.

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Re: Still lose with bonds even at duration

Post by stocknoob4111 » Fri Feb 23, 2018 1:38 pm

Dazed&Confused wrote:
Thu Feb 22, 2018 11:43 am
Stocknoob4111 can you tell me how you arrived at the $16958 interest in your Original example?
Compounded Interest paid out over 6 years

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Re: Still lose with bonds even at duration

Post by Phineas J. Whoopee » Fri Feb 23, 2018 2:53 pm

visualguy wrote:
Wed Feb 21, 2018 10:09 pm
...
Regardless, the more worrying thing is what happens if interest rates go up additional times during those 6 years, so you get additional big drops in NAV because the duration of the fund stays at 6 years, and doesn't shrink as you hold the fund. Even after, say, 5 years of holding the fund, an additional 1% rise in interest rate will drop your NAV by 6%, hurting the return you expected when buying the fund 5 years earlier. Seems like an inferior investment in a rising interest rate environment when compared to CDs.
Poster lack_ey and others, who know the math, say even in a continually-rising environment you would come out ahead of where you would have been had yields not risen at around two times the average duration.

It may be you didn't fully realize it, which is completely understandable because few people, for example members of the financial press, who tell us things, dig in enough to find out, but that's the math.

There is absolutely nothing wrong with using CDs, as you wrote, as part or all of one's fixed income asset allocation.

PJW

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Re: Still lose with bonds even at duration

Post by visualguy » Fri Feb 23, 2018 5:42 pm

Dieharder wrote:
Fri Feb 23, 2018 9:28 am
The point is, unless someone has a crystal ball that tell them exactly when rates are going to rise and when they will stop rising, there is no way to stay out of bonds and into stable value / CDs without risking either losing additional bond returns, or accepting lower returns in a rising rate environment. You are either too early to get out of bond market and into stable value / CDs, in which case you lose additional bond returns, or you are late which means rates have already began to rise and you already have lost principal and getting out now would mean locking in those losses, and instead it is better to stay and get the extra income to offset the losses. The third option is to accept that stable value / CD rates are acceptable even if bonds are providing additional income, you would rather take the reliable published albeit slightly lower rates than risk losing in anticipation of a rising rate environment. The fact is no one actually knows how to time bond maket successfully, it is even more harder than timing stock market.
In what way does a bond market index fund provide additional income when compared to CDs (assuming we leave tax-exempt funds aside)?

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Re: Still lose with bonds even at duration

Post by visualguy » Fri Feb 23, 2018 5:44 pm

Phineas J. Whoopee wrote:
Fri Feb 23, 2018 2:53 pm
Poster lack_ey and others, who know the math, say even in a continually-rising environment you would come out ahead of where you would have been had yields not risen at around two times the average duration.

It may be you didn't fully realize it, which is completely understandable because few people, for example members of the financial press, who tell us things, dig in enough to find out, but that's the math.

There is absolutely nothing wrong with using CDs, as you wrote, as part or all of one's fixed income asset allocation.

PJW
I'm well-aware of the twice duration (2D-1) study, but that's a really long time to wait on something like the total bond market fund.

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Re: Still lose with bonds even at duration

Post by dbr » Fri Feb 23, 2018 6:24 pm

visualguy wrote:
Fri Feb 23, 2018 5:44 pm
Phineas J. Whoopee wrote:
Fri Feb 23, 2018 2:53 pm
Poster lack_ey and others, who know the math, say even in a continually-rising environment you would come out ahead of where you would have been had yields not risen at around two times the average duration.

It may be you didn't fully realize it, which is completely understandable because few people, for example members of the financial press, who tell us things, dig in enough to find out, but that's the math.

There is absolutely nothing wrong with using CDs, as you wrote, as part or all of one's fixed income asset allocation.

PJW
I'm well-aware of the twice duration (2D-1) study, but that's a really long time to wait on something like the total bond market fund.
That depends on what the investment is for. If there is some reason to be in a hurry to get the money back CDs are an obvious solution.

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Re: Still lose with bonds even at duration

Post by ogd » Fri Feb 23, 2018 6:57 pm

visualguy wrote:
Fri Feb 23, 2018 5:42 pm
Dieharder wrote:
Fri Feb 23, 2018 9:28 am
The point is, unless someone has a crystal ball that tell them exactly when rates are going to rise and when they will stop rising, there is no way to stay out of bonds and into stable value / CDs without risking either losing additional bond returns, or accepting lower returns in a rising rate environment. You are either too early to get out of bond market and into stable value / CDs, in which case you lose additional bond returns, or you are late which means rates have already began to rise and you already have lost principal and getting out now would mean locking in those losses, and instead it is better to stay and get the extra income to offset the losses. The third option is to accept that stable value / CD rates are acceptable even if bonds are providing additional income, you would rather take the reliable published albeit slightly lower rates than risk losing in anticipation of a rising rate environment. The fact is no one actually knows how to time bond maket successfully, it is even more harder than timing stock market.
In what way does a bond market index fund provide additional income when compared to CDs (assuming we leave tax-exempt funds aside)?
Example: viewtopic.php?t=132601 . I haven't done a new one and probably should, some periods since then probably provide even more return with no change in yields.

The source of the extra return is precisely the feature that worries you and leads to recoup times longer than duration if one leaves the fund untouched: the constant duration that the fund maintains, vs a naturally declining duration of individual bonds. One can choose to do this, or shorten duration or buy a maturing instrument when they are close to actually needing the money.

Extra reward for extra risk - just like the decision to buy a 5 year instrument vs a 3 year in the first place. Or rather, for a permanent portfolio position, extra reward for not arbitrarily lowering one's duration from 5 years to zero, then back up every 5 years.
Last edited by ogd on Sat Feb 24, 2018 4:39 am, edited 1 time in total.

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Re: Still lose with bonds even at duration

Post by Artsdoctor » Fri Feb 23, 2018 7:09 pm

stocknoob4111 wrote:
Wed Feb 21, 2018 11:23 pm
So, is my case a good situation to Tax Loss Harvest? Say, I sell these bonds and take a loss of $2,600... I can apply this loss to my ordinary income and get 33% back? So, in this situation I decrease my "losses" from $2,600 to $1,742. Then I can wait 30 days to avoid wash sale rules and pickup VBTLX again for possibly even cheaper.

Opinions on the above strategy? Since my rate of 33% comes from 24% Fed + 9% California State, is TLH allowed at the CA state level as well or only Federal?
Several things. First, are you sure that your federal and state MARGINAL rates are 24% and 9%? Are you paying any net investment taxes? If you are sure that you know your marginal rates, you can then compare your Total Bond Market to muni funds.

Second, you need to look under the hood as to how SEC yield is calculated. The whole idea of the SEC yield is to COMPARE funds. Your yield may be very different in reality. You'll notice that there is sometimes a sizeable difference between SEC yield and distribution; sometimes, the difference is quite small. The SEC yield calculation shows investors what they would earn in yield over the course of a 12-month period if the fund continued earning the same rate for the rest of the year. In a changing rate environment, I wouldn't spend a lot of time calculating out SEC yield.

Third, regarding tax-loss harvesting. You can harvest the losses on both your federal and state forms. In CA, you can also carryover your losses from year to the next, FYI.

You may want go back and do some math. You may choose to integrate muni funds into the equation. You might compare Total Bond + CA intermediate muni versus National intermediate muni + CA intermediate muni versus Total Bond alone. There are other combinations as well. I'd be surprised if you'd want to keep Total Bond alone in your taxable account.

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Re: Still lose with bonds even at duration

Post by stocknoob4111 » Fri Feb 23, 2018 8:00 pm

Artsdoctor wrote:
Fri Feb 23, 2018 7:09 pm
Several things. First, are you sure that your federal and state MARGINAL rates are 24% and 9%?
single, no dependents..
> $82,500/yr = 24% Federal, > $52,612/yr = 9.3% California State

sucks, taxed like I am a high roller which I am not, but it is what it is.

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Re: Still lose with bonds even at duration

Post by Artsdoctor » Fri Feb 23, 2018 9:03 pm

Stock,

I would recommend that you go back and sharpen your pencil.

The Total Bond fund has a duration of 6.1 years, SEC yield of 2.92%, which would then net you a yield of 1.95% after federal and state taxes.

The National intermediate muni fund has a duration of 5.2 years, SEC yield of 2.30%, which would then net you a yield of 2.09% after state taxes.

The CA intermediate muni fund has a duration of 5.3 years, SEC yield of 2.16%, which would then net you a yield of . . . 2.16%.

You'll have to figure out how you want to weigh credit risk, but I'd have to think long and hard about why I'd prefer holding Total Bond in a taxable account. You should also know that the distribution yield is often higher than the SEC yield, so you'll want to take that into consideration.

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Re: Still lose with bonds even at duration

Post by CppCoder » Fri Feb 23, 2018 9:31 pm

Is no one else concerned that the math in the original post doesn't add up? It makes it much harder to compare...

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Re: Still lose with bonds even at duration

Post by nisiprius » Fri Feb 23, 2018 9:53 pm

stocknoob4111 wrote:
Wed Feb 21, 2018 9:23 pm
Was just doing some calculations, I own 11,100 shares of VBTLX that I picked up at 10.69 with yield 2.61%. Total cost was $118,659. Current price is 10.45 @ 2.91% or $115,995 for a current loss of $2,664.
If I wait 6 years and assuming interest rates stay *exactly* where they are I thought i'd compare my current situation vs where I would've been when I bought:
Original:
$118,659 @ 2.61% compounded over 6 years: $138,751, interest paid: $16,958, taxes paid at 33% marginal: $5596, Net: $133,155
Current:
$115,995 @ 2.91% compounded over 6 years: $138,094, interest paid: $18,678, taxes: $6,164, Net: $131,930
Net loss: $1,225 over 6 years
And this is IF interest rates don't go up anymore at all which is highly doubtful.
You don't mention the date you bought the shares. Morningstar is showing me a NAV per share of VBTLX of $10.46 on 2/22/2018. The closest I can find to $10.69 that's about six years ago is a NAV of $10.67 on 6/28/2013.
I'm not at all sure I understand what you are doing in your calculations, or in real life, with the dividends paid out by the fund, which of course are not reflected in the price or the NAV.
$10,000 invested in the fund on 6/28/2013, with dividends reinvested, would have grown to $11,086.15. So I am not clear on why you say you experienced a los of $1,225 over 6 years. It seems to me that over the last six years you should have gained $1,086.15. What am I missing?
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triceratop
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Re: Still lose with bonds even at duration

Post by triceratop » Fri Feb 23, 2018 9:58 pm

Artsdoctor wrote:
Fri Feb 23, 2018 9:03 pm
Stock,

I would recommend that you go back and sharpen your pencil.

The Total Bond fund has a duration of 6.1 years, SEC yield of 2.92%, which would then net you a yield of 1.95% after federal and state taxes.

The National intermediate muni fund has a duration of 5.2 years, SEC yield of 2.30%, which would then net you a yield of 2.09% after state taxes.

The CA intermediate muni fund has a duration of 5.3 years, SEC yield of 2.16%, which would then net you a yield of . . . 2.16%.

You'll have to figure out how you want to weigh credit risk, but I'd have to think long and hard about why I'd prefer holding Total Bond in a taxable account. You should also know that the distribution yield is often higher than the SEC yield, so you'll want to take that into consideration.
Aren’t these durations inaccurate for purposes of comparison because they are not adjusted to a post-tax basis?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Still lose with bonds even at duration

Post by stocknoob4111 » Fri Feb 23, 2018 10:14 pm

nisiprius wrote:
Fri Feb 23, 2018 9:53 pm
You don't mention the date you bought the shares. Morningstar is showing me a NAV per share of VBTLX of $10.46 on 2/22/2018. The closest I can find to $10.69 that's about six years ago is a NAV of $10.67 on 6/28/2013.
I actually acquired the shares on Jan 11 2018. I am trying to do some forward analysis to see where I would end up 6 years from now if interest rates stayed put as of now.

At a 33% tax rate you make up only 67% of the losses due to NAV due to taxes since you don't recoup the entire amount back. However using the TLH technique above to get a max of $3000 * .33 back each year would probably work to alleviate some of this.

Yes, I am only looking at the SEC yield as that is the only number available.

I do understand that in a rising rate environment dividend re-investment is more advantaged in a bond fund vs a CD due to re-investment at a higher yield/lower NAV unlike a CD where it is re-invested at the same rate.

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Re: Still lose with bonds even at duration

Post by nisiprius » Sat Feb 24, 2018 8:04 am

Well, it is what it is, and you should do what you think best, but I think you might be ignoring the fact that bond market values (and interest rates) show a lot of short-term fluctuation, and overreacting to a short-term change.

Here's the price chart for VBMFX:

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You're sort of assuming that the recent drop (red sketch lines) is permanent, and not just one of the many downward drops we've seen in the past. Maybe the effect of recent rising interest rates should be modeled as something smoother (blue sketch line, drawn by eye). Or not. I don't know.

As for the comment about "duration," and 2D-1 being "a long time to wait" for Total Bond, all I can do is point out what Vanguard has said. They put Total Bond into "risk potential" category 2, and describe funds in that category by saying, Vanguard's words, " In general, such funds may be appropriate for investors with medium-term investment horizons (four to ten years)." So we can quibble about "ten" versus "2D-1 = eleven," but you can't say Vanguard wasn't reasonably upfront about it.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Still lose with bonds even at duration

Post by nisiprius » Sat Feb 24, 2018 8:15 am

Here's another way to look at it. Again, maybe optimistic spin on my part.

When did "rising rates" begin? The relation between Fed acts and the 10-year rate is loose and indirect, but... I say, oh, November, 2015? Fair enough?

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Well, in Total Bond, with reinvested fund dividends, the effect has been to reduce total return and make Total Bond a sucky investment compared with many possible alternatives, but, still, overall, since November 2015, would a $10,000 investment in Total Bond have lost money or made money?

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Re: Still lose with bonds even at duration

Post by Olemiss540 » Sat Feb 24, 2018 8:40 am

How does going from 118k-131k (after tax) equal a loss? It seems to me you did not accurately calculate risk adjusted AFTER TAX returns prior to investing and are now hoping to go to a lower risk, lower return investment due to intramonth nav turbulence.

What duration is the money to be utilized for and what purpose?
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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Re: Still lose with bonds even at duration

Post by Elysium » Sat Feb 24, 2018 8:47 am

visualguy wrote:
Fri Feb 23, 2018 5:42 pm
Dieharder wrote:
Fri Feb 23, 2018 9:28 am
The point is, unless someone has a crystal ball that tell them exactly when rates are going to rise and when they will stop rising, there is no way to stay out of bonds and into stable value / CDs without risking either losing additional bond returns, or accepting lower returns in a rising rate environment. You are either too early to get out of bond market and into stable value / CDs, in which case you lose additional bond returns, or you are late which means rates have already began to rise and you already have lost principal and getting out now would mean locking in those losses, and instead it is better to stay and get the extra income to offset the losses. The third option is to accept that stable value / CD rates are acceptable even if bonds are providing additional income, you would rather take the reliable published albeit slightly lower rates than risk losing in anticipation of a rising rate environment. The fact is no one actually knows how to time bond maket successfully, it is even more harder than timing stock market.
In what way does a bond market index fund provide additional income when compared to CDs (assuming we leave tax-exempt funds aside)?
Knowing nothing about the direction of future interest rates, the best predictor of bond returns are current yields, as of friday TBM index has a 30 day SEC yield of 2.93%, and an average duration of 6.1 years. The best 5 year CDs in the market has a rate of 2.5%. Only with the CD you are guaranteed to get the 2.5% over the next 5 years, and with the TBM you may get more or less depending on the direction of rates. If the rates go down, you will get extra returns from price movement upwards, as indicated by the excess returns over last decade, or if the rates go up like the financial press and pundits are trying to convince everyone then you get less than the offered rate. Rates could very well go down, or it could go up. Pick your poison. No one knows nothing.

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Re: Still lose with bonds even at duration

Post by visualguy » Sat Feb 24, 2018 1:22 pm

Dieharder wrote:
Sat Feb 24, 2018 8:47 am
Knowing nothing about the direction of future interest rates, the best predictor of bond returns are current yields, as of friday TBM index has a 30 day SEC yield of 2.93%, and an average duration of 6.1 years. The best 5 year CDs in the market has a rate of 2.5%. Only with the CD you are guaranteed to get the 2.5% over the next 5 years, and with the TBM you may get more or less depending on the direction of rates. If the rates go down, you will get extra returns from price movement upwards, as indicated by the excess returns over last decade, or if the rates go up like the financial press and pundits are trying to convince everyone then you get less than the offered rate. Rates could very well go down, or it could go up. Pick your poison. No one knows nothing.
5-year brokered CDs are at 2.8% now, not 2.5%.

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Re: Still lose with bonds even at duration

Post by Artsdoctor » Sat Feb 24, 2018 2:27 pm

triceratop wrote:
Fri Feb 23, 2018 9:58 pm
Artsdoctor wrote:
Fri Feb 23, 2018 9:03 pm
Stock,

I would recommend that you go back and sharpen your pencil.

The Total Bond fund has a duration of 6.1 years, SEC yield of 2.92%, which would then net you a yield of 1.95% after federal and state taxes.

The National intermediate muni fund has a duration of 5.2 years, SEC yield of 2.30%, which would then net you a yield of 2.09% after state taxes.

The CA intermediate muni fund has a duration of 5.3 years, SEC yield of 2.16%, which would then net you a yield of . . . 2.16%.

You'll have to figure out how you want to weigh credit risk, but I'd have to think long and hard about why I'd prefer holding Total Bond in a taxable account. You should also know that the distribution yield is often higher than the SEC yield, so you'll want to take that into consideration.
Aren’t these durations inaccurate for purposes of comparison because they are not adjusted to a post-tax basis?
I have to admit, I'm not aware of how post-tax basis would affect the duration. I view duration as a measure of volatility and I've not seen tax considerations factored into the equations. All of that said, I am not one to calculate my own duration (far too complicated for me) and I also only loosely use duration to alert me to volatility.

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Re: Still lose with bonds even at duration

Post by Elysium » Sat Feb 24, 2018 5:10 pm

visualguy wrote:
Sat Feb 24, 2018 1:22 pm
Dieharder wrote:
Sat Feb 24, 2018 8:47 am
Knowing nothing about the direction of future interest rates, the best predictor of bond returns are current yields, as of friday TBM index has a 30 day SEC yield of 2.93%, and an average duration of 6.1 years. The best 5 year CDs in the market has a rate of 2.5%. Only with the CD you are guaranteed to get the 2.5% over the next 5 years, and with the TBM you may get more or less depending on the direction of rates. If the rates go down, you will get extra returns from price movement upwards, as indicated by the excess returns over last decade, or if the rates go up like the financial press and pundits are trying to convince everyone then you get less than the offered rate. Rates could very well go down, or it could go up. Pick your poison. No one knows nothing.
5-year brokered CDs are at 2.8% now, not 2.5%.
Ok, doesn't matter, the larger point is invest in what you are comfortable, don't think you are going to outsmart the bond market by trying to pick a time to stay out and then jump in.

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Re: Still lose with bonds even at duration

Post by visualguy » Sat Feb 24, 2018 5:58 pm

Dieharder wrote:
Sat Feb 24, 2018 5:10 pm
Ok, doesn't matter, the larger point is invest in what you are comfortable, don't think you are going to outsmart the bond market by trying to pick a time to stay out and then jump in.
Yes, I agree. I just don't see the point in jumping into the bond fund market - I'm not advocating timing. I would just stay with the CDs.

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Re: Still lose with bonds even at duration

Post by Elysium » Sat Feb 24, 2018 6:16 pm

visualguy wrote:
Sat Feb 24, 2018 5:58 pm
Dieharder wrote:
Sat Feb 24, 2018 5:10 pm
Ok, doesn't matter, the larger point is invest in what you are comfortable, don't think you are going to outsmart the bond market by trying to pick a time to stay out and then jump in.
Yes, I agree. I just don't see the point in jumping into the bond fund market - I'm not advocating timing. I would just stay with the CDs.
Yes, if you are already in CDs, or have new money to purchase fixed income. But if you are already in bond funds then no point trying to jump out, and if you do jump out then it could prove profitable or not in the long run, no way to tell for sure.

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Re: Still lose with bonds even at duration

Post by triceratop » Sun Feb 25, 2018 2:40 pm

Artsdoctor wrote:
Sat Feb 24, 2018 2:27 pm
triceratop wrote:
Fri Feb 23, 2018 9:58 pm
Artsdoctor wrote:
Fri Feb 23, 2018 9:03 pm
Stock,

I would recommend that you go back and sharpen your pencil.

The Total Bond fund has a duration of 6.1 years, SEC yield of 2.92%, which would then net you a yield of 1.95% after federal and state taxes.

The National intermediate muni fund has a duration of 5.2 years, SEC yield of 2.30%, which would then net you a yield of 2.09% after state taxes.

The CA intermediate muni fund has a duration of 5.3 years, SEC yield of 2.16%, which would then net you a yield of . . . 2.16%.

You'll have to figure out how you want to weigh credit risk, but I'd have to think long and hard about why I'd prefer holding Total Bond in a taxable account. You should also know that the distribution yield is often higher than the SEC yield, so you'll want to take that into consideration.
Aren’t these durations inaccurate for purposes of comparison because they are not adjusted to a post-tax basis?
I have to admit, I'm not aware of how post-tax basis would affect the duration. I view duration as a measure of volatility and I've not seen tax considerations factored into the equations. All of that said, I am not one to calculate my own duration (far too complicated for me) and I also only loosely use duration to alert me to volatility.
It's correct to view duration as a measure of volatility to interest rates. My point is that tax considerations must necessarily be factored into the equations, and especially if you are comparing between funds which distribute tax-exempt and taxable income. Now, the duration is defined as the length of time for an investor to be repaid the bond's price by cash flows. If those cash flows are taxed at different rates then the simple interpretation of duration will be inaccurate because one is interested in a post-tax sensitivity, or post-tax indifference to interest rate changes.

This has been covered some in the literature:

Adjusting 'Duration' Estimates For Tax Payments, Baesel (1977)

The Effect of Taxation on Immunization Rules and Duration Estimation, Hessel (1981)
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Re: Still lose with bonds even at duration

Post by Artsdoctor » Sun Feb 25, 2018 4:12 pm

^ Interesting. Thanks for the reading material and the insight.

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Re: Still lose with bonds even at duration

Post by Dazed&Confused » Wed Feb 28, 2018 9:36 pm

CppCoder wrote:
Fri Feb 23, 2018 9:31 pm
Is no one else concerned that the math in the original post doesn't add up? It makes it much harder to compare...
That is the first thing I checked, and did find differences from my calculations. Some numbers were close, others not so close. Could be my error, but did not get enough information on how the OP made their calculations to reconcile.
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