Kevin M wrote:A short-term Treasury fund is not really a substitute for cash. For example, max drawdown for VFISX often has exceeded -0.6%, with the most recent such drawdown of -0.84% from July-November of 2016, from which the fund had not yet recovered as of the end of March (and I believe it still has not recovered).
OK it's not cash but neither is Prime MM since the rules changed. I also don't know what you mean by "draw down". I see only about 15 bps in price
over the last five years.
I should have provided a link; here it is: Backtest Portfolio Asset Allocation
Drawdown is a period of negative total return. PV uses monthly returns, so the the drawdowns are for monthly returns--could be worse for daily returns, and you could use M* to check that.
Price on July 7 was 10.80, and on March 8 it was 10.61, so price decline alone was -1.8%. For the drawdown period corresponding to the monthly PV data, price on June 30 was 10.80 and on November 30 was 10.67, so price decline for that period was -1.2%, and the interest brought total return back up to -0.84%.
Maximum drawdown was -2.23%, beginning in Feb 1994, lasting three months, with a recovery time of one year. Again, this is for monthly returns.
A cent is not a basis point, so calling 15 cents 15 bps makes no sense. The math for the price decline would be -0.15/10.80 = -1.4%. Since there is no difference of percentages involved anywhere in this calculation, basis points or percentage points are not relevant units.
And remember, I don't use Prime MM or any MM--at least not in a taxable account. I use a savings account, currently paying 1.05%. I was just commenting that Prime MM is approaching parity with a decent savings account; when it offers a decent yield premium over a savings account, I might start using it again.
If we want to compare a Treasury fund to Prime MM, we should compare Treasury MM fund, with an SEC yield of 0.63%. This is consistent with the 1-month Treasury yield of 0.68%.
The short-term Treasury fund only holds only about 20% of its portfolio in Treasuries with maturities of less than one year. It must hold Treasuries with maturities longer than that to get its yield into the 1% ballpark. Its average duration is 2.2 years, which is why we see the types of drawdowns that we do. I'll take 1% at 0 years duration over 1% at 2.2 years duration, thank you very much.