Vanguard High-Yield vs. Long-Term Bond

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latak215
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Vanguard High-Yield vs. Long-Term Bond

Post by latak215 » Tue Apr 02, 2019 10:49 pm

The expected return on Vanguard high-yield bonds is 2% or so higher than the safer BLV, the Long-Term Bond ETF. I wonder what percentage of companies are expected to go belly up in a year to justify choosing a safer bond fund. Thanks.

billfromct
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Re: low yield bons vs high yield ones

Post by billfromct » Wed Apr 03, 2019 4:03 am

You may want to use mutual fund or ETF names & not the ticker symbols.

Not many people have memorized the thousands of mutual fund & ETF ticker symbols.

Not many people will take the time to look them up.

bill

Thesaints
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Re: low yield bons vs high yield ones

Post by Thesaints » Wed Apr 03, 2019 7:02 am

latak215 wrote:
Tue Apr 02, 2019 10:49 pm
The expected return
How did you estimate it ? True expected return already takes defaults into account.

dbr
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Re: low yield bons vs high yield ones

Post by dbr » Wed Apr 03, 2019 7:26 am

The justification for a safer bond fund is that you want safety in preference over return. The justification for a riskier bond fund is that you want return in preference over safety. It is a choice you get to make depending on what you want. It may or may not be meaningful to look at a figure of merit such as Sharpe ratio. There are other ways to take risk for return than choosing riskier bonds, so what you do also depends on your overall situation.

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Wiggums
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Re: low yield bons vs high yield ones

Post by Wiggums » Wed Apr 03, 2019 7:29 am

dbr wrote:
Wed Apr 03, 2019 7:26 am
The justification for a safer bond fund is that you want safety in preference over return. The justification for a riskier bond fund is that you want return in preference over safety. It is a choice you get to make depending on what you want. It may or may not be meaningful to look at a figure of merit such as Sharpe ratio. There are other ways to take risk for return than choosing riskier bonds, so what you do also depends on your overall situation.
I agree. I’m not interested in high yield bonds. I like high quality bonds.

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grabiner
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Re: low yield bons vs high yield ones

Post by grabiner » Wed Apr 03, 2019 10:36 pm

The problem with a high-yield bond fund is that it has a higher expected return than an investment-grade fund, but the risk shows up at the wrong time. For example, look at the 2008 returns of high-yield bond funds, versus Treasury or total-market index bond funds. When you needed your bond fund to reduce the risk of your portfolio, the high-yield fund failed.

A high-yield fund should be viewed as about half stock and half bond in your asset allocation, as it is likely to have return between the returns of stock and bond funds, whether stocks do well or poorly.
Wiki David Grabiner

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latak215
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Re: low yield bons vs high yield ones

Post by latak215 » Wed Apr 03, 2019 10:53 pm

Thank you for responses. vg high yield bond fund vweax vs vg intermediate bond index fund biv are the ones I am looking at. Sec yield is posted at 5.7 and 3.7%. I would like to know the default rate of these bonds to see the justification for the low yield. Thanks

tibbitts
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Re: low yield bons vs high yield ones

Post by tibbitts » Wed Apr 03, 2019 11:05 pm

latak215 wrote:
Wed Apr 03, 2019 10:53 pm
Thank you for responses. vg high yield bond fund vweax vs vg intermediate bond index fund biv are the ones I am looking at. Sec yield is posted at 5.7 and 3.7%. I would like to know the default rate of these bonds to see the justification for the low yield. Thanks
Nobody can tell you the default rate going forward, but the default rate will likely be very close to zero (for both funds in this case), because the fund will do its best to sell downgraded bonds before they default. They might sell them for a high percentage loss, but they'll try to sell them.

Valuethinker
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Re: Vanguard High-Yield vs. Long-Term Bond

Post by Valuethinker » Thu Apr 04, 2019 4:15 am

latak215 wrote:
Tue Apr 02, 2019 10:49 pm
The expected return on Vanguard high-yield bonds is 2% or so higher than the safer BLV, the Long-Term Bond ETF. I wonder what percentage of companies are expected to go belly up in a year to justify choosing a safer bond fund. Thanks.
default rate varies with the economic cycle - Edward Altman at NYU used to publish that information but I think he has died. That data is available.

Recovery rate also varies with cycle.

Ignoring liquidity risk (increases yield of HY bonds) and interest rate risk (HY bond fund has lower interest rate risk due to higher coupons & yields).

Then

YTM US Treasury Bond fund = YTM HY bond fund - expected defaults + expected recoveries

in an efficient market

It's unlikely there is any exploitable inefficiency in the pricing of HY bonds. William Bernstein had a piece on Efficient Frontier re when to buy these bonds. The answer is when the credit spread over safe bonds of the same maturity is very high. Right now it is historically low but not as low as it has been in the recent past?

The argument for holding HY bonds is that credit is a separate risk factor orthogonal to size, value, term risk etc. See Anti Ilmanen's books for some deeper discussion of this.

Certainly HY bond funds have higher volatility - take a look at 2008-09 to see that.

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latak215
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Re: Vanguard High-Yield vs. Long-Term Bond

Post by latak215 » Thu Apr 04, 2019 8:10 am

I am trying to allocate 70% of regular and ira assets in bonds as stocks are close to high and international trade worries are fluctuating stock markets. Within the bonds trying to put 1/3 each in high , moderate and low yields. Thanks.

Dottie57
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Re: Vanguard High-Yield vs. Long-Term Bond

Post by Dottie57 » Thu Apr 04, 2019 8:19 am

latak215 wrote:
Thu Apr 04, 2019 8:10 am
I am trying to allocate 70% of regular and ira assets in bonds as stocks are close to high and international trade worries are fluctuating stock markets. Within the bonds trying to put 1/3 each in high , moderate and low yields. Thanks.
With those yields the funds will have high, moderate and low risk. I want safety with bonds and use stocks to generate returns. If you want more return change asset allocation.

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