Example of why to favor Treasury-only bond funds

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stlutz
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Example of why to favor Treasury-only bond funds

Post by stlutz » Thu Jan 21, 2016 8:29 pm

Some people here over the years have advocated using Treasury-only bond funds instead of the total bond index, corporate bonds, munis etc.

Here is an example why. YTD returns of some iShares ETFs through yesterday (1/20):

Aggregate Bond (AGG): +1.07%
Treasury bonds (GOVT): +1.80%
Investment Grade bonds (CRED): +.30%
Muni Bonds (MUB): +1.02%

For me at least, bonds are there not only for yield and safety but also how they do in bad times. So far this year nothing else has been as good of a diversifier as Treasury bonds. (Well--nothing else except gold, but I'll let somebody else go down that road. :happy )

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grabiner
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Re: Example of why to favor Treasury-only bond funds

Post by grabiner » Thu Jan 21, 2016 9:31 pm

Here's a similar example, showing 2008 performance: A graphic on the role of bonds. When you most needed bonds to diversify your portfolio because stocks lost half their value, Treasuries rose, Total Bond Market Index stayed on its trend line, and investment-grade corporate bonds fell slightly.
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naha66
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Re: Example of why to favor Treasury-only bond funds

Post by naha66 » Fri Jan 22, 2016 12:27 am

Talk about short term selection. This is why I use both corp and treasury. Who would use less than one month performance or only 1 year. If you used only treasury's you give up too much long term.

http://performance.morningstar.com/fund ... on?t=VFICX

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mephistophles
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Re: Example of why to favor Treasury-only bond funds

Post by mephistophles » Fri Jan 22, 2016 12:44 am

Maybe its just me, but when I read that material and clicked on the video, it led me here.....

I’m Ready to Team Up With James
Davidson for Both Safety and Profits!

Appears to be a sales pitch embedded in a so-called news story. What do you think?

dkturner
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Re: Example of why to favor Treasury-only bond funds

Post by dkturner » Fri Jan 22, 2016 7:58 am

stlutz wrote:Some people here over the years have advocated using Treasury-only bond funds instead of the total bond index, corporate bonds, munis etc.

Here is an example why. YTD returns of some iShares ETFs through yesterday (1/20):

Aggregate Bond (AGG): +1.07%
Treasury bonds (GOVT): +1.80%
Investment Grade bonds (CRED): +.30%
Muni Bonds (MUB): +1.02%

For me at least, bonds are there not only for yield and safety but also how they do in bad times. So far this year nothing else has been as good of a diversifier as Treasury bonds. (Well--nothing else except gold, but I'll let somebody else go down that road. :happy )
I wonder how much sleep Jack Bogle is losing over this? I mean this carnage has been going on for 20 days!

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Re: Example of why to favor Treasury-only bond funds

Post by Call_Me_Op » Fri Jan 22, 2016 8:00 am

naha66 wrote:Talk about short term selection. This is why I use both corp and treasury. Who would use less than one month performance or only 1 year. If you used only treasury's you give up too much long term.

http://performance.morningstar.com/fund ... on?t=VFICX
I do not see how this plot demonstrates your point.
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in_reality
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Re: Example of why to favor Treasury-only bond funds

Post by in_reality » Fri Jan 22, 2016 8:06 am

Call_Me_Op wrote:
naha66 wrote:Talk about short term selection. This is why I use both corp and treasury. Who would use less than one month performance or only 1 year. If you used only treasury's you give up too much long term.

http://performance.morningstar.com/fund ... on?t=VFICX
I do not see how this plot demonstrates your point.
It seems corporates have outperformed treasuries (over the life of GOVT which start at about 03/01/2012 -- put in that date it's more clear) ...

http://quote.morningstar.com/fund/chart ... %2C0%22%7D

naha66
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Re: Example of why to favor Treasury-only bond funds

Post by naha66 » Fri Jan 22, 2016 10:23 am

Click on expanded view, I assumed people on this forum were smarter than me. :?

jimkinny
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Re: Example of why to favor Treasury-only bond funds

Post by jimkinny » Fri Jan 22, 2016 2:21 pm

I understand your point from a theoretical pov but a 1.5% increase in an intermediate type of treasury fund seems unimportant in the real world.

I think the important case that can be made for fed gov backed bonds is illustrate by the doomsday scenario of another great depression like event.

It is not very important to have stocks go down by 15% and Treasuries go up by 2% and then 6 months later, every thing reverse itself.

It would be important to hold gov backed bonds when stocks go down by 50-90% for years and many corporate bonds become worthless because the assets backing those bonds are worthless.

I suppose there are some out there who might care that their portfolio is down by only 13% instead of 15% but not me. We never know of course when down by 15% will morph into 50% down.

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Re: Example of why to favor Treasury-only bond funds

Post by saurabh » Fri Jan 22, 2016 3:45 pm

stlutz wrote: For me at least, bonds are there not only for yield and safety but also how they do in bad times. So far this year nothing else has been as good of a diversifier as Treasury bonds. (Well--nothing else except gold, but I'll let somebody else go down that road. :happy )
Depends on what percentage of bonds you have in your portfolio. I think once you get to 40% bonds or higher you cannot neglect yield differences if they are significant:

IT Treasury (VFIUX): 1.60%, 5.4 years duration
IT Tax-Exempt (VWIUX): 2.23% (pre-tax equivalent assuming 33% federal income tax and 5% state income tax rate)

Total Bond Market (VBTLX): 2.37%, 5.8 years duration

ST Corporate Bond Index (VSCSX): 2.28%, 2.7 years duration
IT Corporate Bond Index (VICSX): 3.65%, 6.4 years duration

Here are YTD returns as well as 1/3/5-yr returns (they are actually for period ended 12/31/15 due to how Vanguard calculates it with monthly updates only). IT corporate bonds outperformed Treasuries by 1.0% over the past 5 years despite underperformance since beginning of 2015.

Given the 2% higher yield I think all investors who hold significant chunk of bonds can't ignore it. We crib about 10 bps in costs but want to ignore 200 bps potential difference in forward looking returns on half of our portfolio?

YTD, 1-yr, 3-yr, 5-yr Returns
VFIUX: 1.7%, 1.6%, 1.0%, 3.1%
VWIUX: 1.1%, 2.9%, 2.9%, 4.8%

VBTLX: 1.0%, 0.4%, 1.3%, 3.1%

VSCSX: 0.2%, 1.2%, 1.5% 2.6%
VICSX: 0.2%, 0.7%, 2.0%, 5.0%

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Kevin M
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Re: Example of why to favor Treasury-only bond funds

Post by Kevin M » Fri Jan 22, 2016 4:51 pm

Why didn't you include long-term Treasuries, since they have done even better at countering YTD stock declines.

EDV: +6.92%
VGLT: + 4.12%

Or course long-term Treasuries also did best during late 2008.

So why not hold intermediate-term CDs, which provide a higher yields than intermediate-term Treasuries, for the bulk of your fixed income, and hold enough long-term Treasuries to meet your rebalancing needs when stocks decline?

Currently there is a 7-year CD available with an APY of 3%. This is a yield premium of about 120 basis points compared to the 7-year Treasury yield of about 1.8%, and with no additional credit risk. Add in the early withdrawal option (EWP = 180 days of interest) to significantly reduce your term risk, increasing your ability to take more term risk in the long-term Treasuries, and it seems to me you have a winning combination if you want to incorporate some flight-to-safety rebalancing bonus opportunity in your portfolio.

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Day9
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Re: Example of why to favor Treasury-only bond funds

Post by Day9 » Fri Jan 22, 2016 5:03 pm

Kevin M wrote:EDV: +6.92%
VGLT: + 4.12%
Just want to chime in that Vanguard's government bond ETFs (e.g. VGLT, VGIT) hold agency bonds as well as treasuries. EDV is pure STRIPS. Vanguard has funds that are pure treasuries like VUSUX Long Term Treasury. iShares ETF TLT is pure long term treasury.
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Kevin M
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Re: Example of why to favor Treasury-only bond funds

Post by Kevin M » Fri Jan 22, 2016 5:55 pm

Day9 wrote:
Kevin M wrote:EDV: +6.92%
VGLT: + 4.12%
Just want to chime in that Vanguard's government bond ETFs (e.g. VGLT, VGIT) hold agency bonds as well as treasuries. EDV is pure STRIPS. Vanguard has funds that are pure treasuries like VUSUX Long Term Treasury. iShares ETF TLT is pure long term treasury.
OK, let's add YTD returns in for these:

VUSTX: +4.10% (Investor shares)
VUSUX: +4.10% (Admiral shares)
TLT: +4.28%

Clearly it's the term risk that's being rewarded, and by looking at long-term corporate or investment grade, we can see that credit risk has been detracting (as expected, due to correlation with stocks). Inclusion of agencies doesn't seem to have hurt much if at all.

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staythecourse
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Re: Example of why to favor Treasury-only bond funds

Post by staythecourse » Fri Jan 22, 2016 10:48 pm

This fits in the who cares category. One's bond allocation should be consistent with one's needed duration as the MOST important criteria. Who cares if one does better then the other in a time period shorter then your needed duration?

Also, if you did needed the money in the last 1 month then anything outside of MM or t bills is a no- no.

Good luck.
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