Total Bond - SEC yield breaks 3%
Total Bond - SEC yield breaks 3%
Vanguard Total Bond (VBTLX, BND) SEC yield went over 3% last week, today at 3.06.
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Re: Total Bond - SEC yield breaks 3%
Not bad. I happened to check Vanguard Short-Term Treasury ETF (VGSH) today, and was surprised to see it's SEC yield at 2.36%.
Re: Total Bond - SEC yield breaks 3%
The year to date gain for Total Bond Market is -2.33%.
Re: Total Bond - SEC yield breaks 3%
Two year cumulative total return = 00.05% (BND)
$5.43 per $10K invested.
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Re: Total Bond - SEC yield breaks 3%
Worrying about the ST return on this fund probably means that it was too aggressive of a choice.
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Re: Total Bond - SEC yield breaks 3%
That's certainly possible.
Maybe this will help some who've forgotten it realize that a broadly diversified indexed bond fund is not as safe and secure as many believe it to be. If you want safety above all else, stick with CDs and the like.
The Sensible Steward
Re: Total Bond - SEC yield breaks 3%
The vast majority of current investors have never seen a bear bond market.
Not saying we're in one, but its been a bumpy downhill ride on interest rates since the fall of 1981.
Maybe spring/summer 2016 was an inflection maybe not, but most bond investors don't have a clue how ugly things can get in nominal fixed income with duration risk, especially in real terms.
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Re: Total Bond - SEC yield breaks 3%
Does this mean that I get 3% dividend if I put money in this fund? ie is it like I get a 3% dividend , just like a cd but better .... but caveat that my principal might go down?
This always confuses me ie ... is the yield shown ie 3.00% here .. a genuine firm figure that I can bet the farm on?
This always confuses me ie ... is the yield shown ie 3.00% here .. a genuine firm figure that I can bet the farm on?
Re: Total Bond - SEC yield breaks 3%
MnD wrote: ↑Mon May 07, 2018 7:47 pmThe vast majority of current investors have never seen a bear bond market.
Not saying we're in one, but its been a bumpy downhill ride on interest rates since the fall of 1981.
Maybe spring/summer 2016 was an inflection maybe not, but most bond investors don't have a clue how ugly things can get in nominal fixed income with duration risk, especially in real terms.
Certainly and you could probably add seeing nominal bond returns getting crushed by inflation.
It can be rough out there.
Re: Total Bond - SEC yield breaks 3%
Not quite like a CD, but SEC yield is the best predictor of future return. The fund pays more than CDs with the caveat that you describe, some loss of principal is possible over short time periods. However the CD isn't as safe as you might think, because there is something less visible happening too: inflation. Your CD is losing value to it all the time. Inflation takes more away from cash, in the long run, than changes in interest rates will take away from intermediate bond funds. A 2% inflation rate will cut the value of your money in half in 35 years. The bond fund slightly beats this inflation rate after taxes. Some CDs and safer investments don't beat it at all.sonosoldi3112 wrote: ↑Mon May 07, 2018 7:49 pm Does this mean that I get 3% dividend if I put money in this fund? ie is it like I get a 3% dividend , just like a cd but better .... but caveat that my principal might go down?
This always confuses me ie ... is the yield shown ie 3.00% here .. a genuine firm figure that I can bet the farm on?
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Re: Total Bond - SEC yield breaks 3%
Based on the current status of the market, money currently in the TBM fund will yield 3% going forward. Over the course of the next ten years, this is very likely going to be the approximate annual return that you as an investor will get. Yes, if rates keep going up, the principal value of your bond fund will decline, but your yield on that principal will also go up, pretty much offsetting each other.sonosoldi3112 wrote: ↑Mon May 07, 2018 7:49 pm Does this mean that I get 3% dividend if I put money in this fund? ie is it like I get a 3% dividend , just like a cd but better .... but caveat that my principal might go down?
This always confuses me ie ... is the yield shown ie 3.00% here .. a genuine firm figure that I can bet the farm on?
But things could change either way. No guarantees. If you want a guarantee, something you can "bet the farm on," buy a CD instead.
The Sensible Steward
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Re: Total Bond - SEC yield breaks 3%
Who says the CD is losing value to it all the time? I can get a 5-year CD right now from Goldman Sachs for 2.80% (basically the rate on 5-year treasuries as well). Inflation has been well below that level. Furthermore, even if inflation were to spike and rates increased, one could possibly break the CD and invest in a higher-paying CD. That 5-year CD I just mentioned has a 9-month interest EWP, which is 2.07%. That is the maximum nominal loss you will sustain with such a CD.z3r0c00l wrote: ↑Mon May 07, 2018 7:58 pmNot quite like a CD, but SEC yield is the best predictor of future return. The fund pays more than CDs with the caveat that you describe, some loss of principal is possible over short time periods. However the CD isn't as safe as you might think, because there is something less visible happening too: inflation. Your CD is losing value to it all the time. Inflation takes more away from cash, in the long run, than changes in interest rates will take away from intermediate bond funds. A 2% inflation rate will cut the value of your money in half in 35 years. The bond fund slightly beats this inflation rate after taxes. Some CDs and safer investments don't beat it at all.sonosoldi3112 wrote: ↑Mon May 07, 2018 7:49 pm Does this mean that I get 3% dividend if I put money in this fund? ie is it like I get a 3% dividend , just like a cd but better .... but caveat that my principal might go down?
This always confuses me ie ... is the yield shown ie 3.00% here .. a genuine firm figure that I can bet the farm on?
I don't think your post is a fair analysis of the benefits and drawbacks of CDs and bond funds. By the way the reason the Total Bond fund pays more than the CD is not due to interest rate risk but because it holds corporate bonds and you are being rewarded for credit risk.
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Re: Total Bond - SEC yield breaks 3%
Investors should always pay close attention to inflation and real rates of return, but as of now, two year CDs are paying about 2.6% interest, which is slightly higher than the current inflation rate. So they aren't losing value to inflation as of now. Yes, the TBM has a higher yield, but it can also fluctuate in the actual return quite a lot. Note that another poster already showed that TBM fund has had effectively no return over the last two years.z3r0c00l wrote: ↑Mon May 07, 2018 7:58 pm However the CD isn't as safe as you might think, because there is something less visible happening too: inflation. Your CD is losing value to it all the time. Inflation takes more away from cash, in the long run, than changes in interest rates will take away from intermediate bond funds. A 2% inflation rate will cut the value of your money in half in 35 years. The bond fund slightly beats this inflation rate after taxes. Some CDs and safer investments don't beat it at all.
The Sensible Steward
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Re: Total Bond - SEC yield breaks 3%
triceratop wrote: ↑Mon May 07, 2018 8:06 pmWho says the CD is losing value to it all the time? I can get a 5-year CD right now from Goldman Sachs for 2.80% (basically the rate on 5-year treasuries as well). Inflation has been well below that level. Furthermore, even if inflation were to spike and rates increased, one could possibly break the CD and invest in a higher-paying CD. That 5-year CD I just mentioned has a 9-month interest EWP, which is 2.07%. That is the maximum nominal loss you will sustain with such a CD.z3r0c00l wrote: ↑Mon May 07, 2018 7:58 pmNot quite like a CD, but SEC yield is the best predictor of future return. The fund pays more than CDs with the caveat that you describe, some loss of principal is possible over short time periods. However the CD isn't as safe as you might think, because there is something less visible happening too: inflation. Your CD is losing value to it all the time. Inflation takes more away from cash, in the long run, than changes in interest rates will take away from intermediate bond funds. A 2% inflation rate will cut the value of your money in half in 35 years. The bond fund slightly beats this inflation rate after taxes. Some CDs and safer investments don't beat it at all.sonosoldi3112 wrote: ↑Mon May 07, 2018 7:49 pm Does this mean that I get 3% dividend if I put money in this fund? ie is it like I get a 3% dividend , just like a cd but better .... but caveat that my principal might go down?
This always confuses me ie ... is the yield shown ie 3.00% here .. a genuine firm figure that I can bet the farm on?
I don't think your post is a fair analysis of the benefits and drawbacks of CDs and bond funds. By the way the reason the Total Bond fund pays more than the CD is not due to interest rate risk but because it holds corporate bonds and you are being rewarded for credit risk.
Many love to go on about the 'safety' of bonds, but if it's safety that an investor craves, it can be hard to beat relatively short-duration (2-5 years) CDs.
"Take your risk on the equity side."
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The Sensible Steward
Re: Total Bond - SEC yield breaks 3%
It is 3% now, but this is a bond fund, not a single bond so there is technically no maturity date. The fund manager is buying and selling different bonds for the fund all the time and the yield changes all the time.sonosoldi3112 wrote: ↑Mon May 07, 2018 7:49 pm Does this mean that I get 3% dividend if I put money in this fund? ie is it like I get a 3% dividend , just like a cd but better .... but caveat that my principal might go down?
This always confuses me ie ... is the yield shown ie 3.00% here .. a genuine firm figure that I can bet the farm on?
If you want a CD-like bond to lock in the rate, get an individual bond like a 10-year treasury (3% now). It can go up or down during those 10 years, but who cares. You hold out for 10 years, don't sell, get your 3% interest every year for the 10 years, and the whole principle back. This is great for people who only need to withdraw conservatively form their portfolio. Hence why many retirees go into treasuries when they hit 4% + and flee stocks.
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Re: Total Bond - SEC yield breaks 3%
Just like the good old days.
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Re: Total Bond - SEC yield breaks 3%
I thank you all for taking a loss on your TBM so I can get better yields.
Re: Total Bond - SEC yield breaks 3%
Except in a true equity downturn, those CD's will not gain ground like a high quality bond fund. That is not a knock on CDs, but is part of the risk/reward of government heavy diversified bond funds(BND).willthrill81 wrote: ↑Mon May 07, 2018 7:37 pmThat's certainly possible.
Maybe this will help some who've forgotten it realize that a broadly diversified indexed bond fund is not as safe and secure as many believe it to be. If you want safety above all else, stick with CDs and the like.
And 2 years is hardly a blip for a long term investor.
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Re: Total Bond - SEC yield breaks 3%
It's true that both the upside and the downside are limited with CDs. But TBM had a lower return in 2008 and 2009 than it did in 2007*, so I'm not sure how accurate the "stocks go down and bonds go up" argument really is. Over the long-term, the correlation between the two has been close to zero.dwickenh wrote: ↑Mon May 07, 2018 9:06 pmExcept in a true equity downturn, those CD's will not gain ground like a high quality bond fund. That is not a knock on CDs, but is part of the risk/reward of government heavy diversified bond funds(BND).willthrill81 wrote: ↑Mon May 07, 2018 7:37 pmThat's certainly possible.
Maybe this will help some who've forgotten it realize that a broadly diversified indexed bond fund is not as safe and secure as many believe it to be. If you want safety above all else, stick with CDs and the like.
2011 is the only year since 2007 that TBM had a return that high (6.92% in 2007), and it seems likely to be a long while before that happens again.
The Sensible Steward
Re: Total Bond - SEC yield breaks 3%
That is a fair point, but even though the return was not as high in the 2008 and 2009 years, they went from 5.15%(2008) to 7.69% (2011) duringwillthrill81 wrote: ↑Mon May 07, 2018 9:10 pmIt's true that both the upside and the downside are limited with CDs. But TBM had a lower return in 2008 and 2009 than it did in 2007*, so I'm not sure how accurate the "stocks go down and bonds go up" argument really is. Over the long-term, the correlation between the two has been close to zero.dwickenh wrote: ↑Mon May 07, 2018 9:06 pmExcept in a true equity downturn, those CD's will not gain ground like a high quality bond fund. That is not a knock on CDs, but is part of the risk/reward of government heavy diversified bond funds(BND).willthrill81 wrote: ↑Mon May 07, 2018 7:37 pmThat's certainly possible.
Maybe this will help some who've forgotten it realize that a broadly diversified indexed bond fund is not as safe and secure as many believe it to be. If you want safety above all else, stick with CDs and the like.
2011 is the only year since 2007 that TBM had a return that high (6.92% in 2007), and it seems likely to be a long while before that happens again.
the 4 years after 2007. As interest rates were falling, I am sure CDs were not renewing at a higher rate. CDs will always have a place, I just don't believe it is completely replacing bond funds.
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Re: Total Bond - SEC yield breaks 3%
Certainly bond funds of many flavors are fine for investors, but some believe that they are not at all necessary. To quote a famous Boglehead who believes that using CDs exclusively for FI is a good strategy,dwickenh wrote: ↑Mon May 07, 2018 9:21 pmThat is a fair point, but even though the return was not as high in the 2008 and 2009 years, they went from 5.15%(2008) to 7.69% (2011) duringwillthrill81 wrote: ↑Mon May 07, 2018 9:10 pmIt's true that both the upside and the downside are limited with CDs. But TBM had a lower return in 2008 and 2009 than it did in 2007*, so I'm not sure how accurate the "stocks go down and bonds go up" argument really is. Over the long-term, the correlation between the two has been close to zero.dwickenh wrote: ↑Mon May 07, 2018 9:06 pmExcept in a true equity downturn, those CD's will not gain ground like a high quality bond fund. That is not a knock on CDs, but is part of the risk/reward of government heavy diversified bond funds(BND).willthrill81 wrote: ↑Mon May 07, 2018 7:37 pmThat's certainly possible.
Maybe this will help some who've forgotten it realize that a broadly diversified indexed bond fund is not as safe and secure as many believe it to be. If you want safety above all else, stick with CDs and the like.
2011 is the only year since 2007 that TBM had a return that high (6.92% in 2007), and it seems likely to be a long while before that happens again.
the 4 years after 2007. As interest rates were falling, I am sure CDs were not renewing at a higher rate. CDs will always have a place, I just don't believe it is completely replacing bond funds.
"Take your risk on the equity side."
- Larry Swedroe
The Sensible Steward
Re: Total Bond - SEC yield breaks 3%
I just started adding a bond allocation this year via 401k contributions, so I doubly appreciate it.whodidntante wrote: ↑Mon May 07, 2018 8:30 pm I thank you all for taking a loss on your TBM so I can get better yields.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
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Re: Total Bond - SEC yield breaks 3%
Don't forget taxation. Depending on your bracket, between federal and state taxes, you might be keeping only 60% of that interest. That knocks you down to 1.56% after taxes, and now you're losing (a little) relative to inflation. That's ok -- you count on stocks to provide the growth, and bonds to provide stability.willthrill81 wrote: ↑Mon May 07, 2018 8:08 pmInvestors should always pay close attention to inflation and real rates of return, but as of now, two year CDs are paying about 2.6% interest, which is slightly higher than the current inflation rate. So they aren't losing value to inflation as of now. Yes, the TBM has a higher yield, but it can also fluctuate in the actual return quite a lot. Note that another poster already showed that TBM fund has had effectively no return over the last two years.z3r0c00l wrote: ↑Mon May 07, 2018 7:58 pm However the CD isn't as safe as you might think, because there is something less visible happening too: inflation. Your CD is losing value to it all the time. Inflation takes more away from cash, in the long run, than changes in interest rates will take away from intermediate bond funds. A 2% inflation rate will cut the value of your money in half in 35 years. The bond fund slightly beats this inflation rate after taxes. Some CDs and safer investments don't beat it at all.
Re: Total Bond - SEC yield breaks 3%
Given the standard advice to hold bonds in tax-deferred accounts, I reckon the same would apply to CDs as a safer bond alternative.random_walker_77 wrote: ↑Mon May 07, 2018 10:13 pmDon't forget taxation. Depending on your bracket, between federal and state taxes, you might be keeping only 60% of that interest. That knocks you down to 1.56% after taxes, and now you're losing (a little) relative to inflation. That's ok -- you count on stocks to provide the growth, and bonds to provide stability.willthrill81 wrote: ↑Mon May 07, 2018 8:08 pmInvestors should always pay close attention to inflation and real rates of return, but as of now, two year CDs are paying about 2.6% interest, which is slightly higher than the current inflation rate. So they aren't losing value to inflation as of now. Yes, the TBM has a higher yield, but it can also fluctuate in the actual return quite a lot. Note that another poster already showed that TBM fund has had effectively no return over the last two years.z3r0c00l wrote: ↑Mon May 07, 2018 7:58 pm However the CD isn't as safe as you might think, because there is something less visible happening too: inflation. Your CD is losing value to it all the time. Inflation takes more away from cash, in the long run, than changes in interest rates will take away from intermediate bond funds. A 2% inflation rate will cut the value of your money in half in 35 years. The bond fund slightly beats this inflation rate after taxes. Some CDs and safer investments don't beat it at all.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
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Re: Total Bond - SEC yield breaks 3%
While that's true if you have fixed needs for a fixed date, the fact that bond funds are constantly buying into new bonds is both a curse and blessing. If you're locked into that 3% for 10 years, and bond yields climb to 7% because inflation climbs to 4%, you'll be glad you're in the fund as its returns will increase as it cycles into newer bonds at the higher rates. Conversely, you'll be sadder if rates fall, though the rate decrease is balanced in the short term by capital gains on the bonds.220volt wrote: ↑Mon May 07, 2018 8:12 pmIt is 3% now, but this is a bond fund, not a single bond so there is technically no maturity date. The fund manager is buying and selling different bonds for the fund all the time and the yield changes all the time.sonosoldi3112 wrote: ↑Mon May 07, 2018 7:49 pm Does this mean that I get 3% dividend if I put money in this fund? ie is it like I get a 3% dividend , just like a cd but better .... but caveat that my principal might go down?
This always confuses me ie ... is the yield shown ie 3.00% here .. a genuine firm figure that I can bet the farm on?
If you want a CD-like bond to lock in the rate, get an individual bond like a 10-year treasury (3% now). It can go up or down during those 10 years, but who cares. You hold out for 10 years, don't sell, get your 3% interest every year for the 10 years, and the whole principle back. This is great for people who only need to withdraw conservatively form their portfolio. Hence why many retirees go into treasuries when they hit 4% + and flee stocks.
I'm in intermediate bonds, and while the short term dips are a little annoying, I'm glad that my bond funds will finally be earning more going forwards. It's about time.
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Re: Total Bond - SEC yield breaks 3%
Oh, good point, I think there is a difference between tax-deferred and after-tax. My comment applies to after-tax, and would apply to both CDs and bonds.drk wrote: ↑Mon May 07, 2018 10:17 pmGiven the standard advice to hold bonds in tax-deferred accounts, I reckon the same would apply to CDs as a safer bond alternative.random_walker_77 wrote: ↑Mon May 07, 2018 10:13 pm
Don't forget taxation. Depending on your bracket, between federal and state taxes, you might be keeping only 60% of that interest. That knocks you down to 1.56% after taxes, and now you're losing (a little) relative to inflation. That's ok -- you count on stocks to provide the growth, and bonds to provide stability.
In tax-deferred, I don't think it matters because the tax brackets are themselves inflation adjusted. Consider 2% returns and 2% inflation for 35 years. So in real terms, you'll have the same amount of money in 20 years as you have today. In nominal terms, you'll have double the amount of money, but the tax consequences are theoretically identical (assume no changes to tax rules over those 35 years and no change in your income/bracket) because the tax brackets are adjusted for inflation.
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Re: Total Bond - SEC yield breaks 3%
Bond fund investors need to read about and understand a bond fund's "duration". Match the fund's duration to your time horizon and in theory, you'll get approximately the return you expected when you purchased the fund.
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Re: Total Bond - SEC yield breaks 3%
So would a 5yr rolling CD ladder do better than a nominal 5yr duration bond fund in a rising rate environment? If so, how much better? Has anyone done the math on this? Or is there any backtested data available?
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Re: Total Bond - SEC yield breaks 3%
Kevin M has done many blogposts and forum posts on this topic. An example, among many others.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
Re: Total Bond - SEC yield breaks 3%
I'm starting to think that maybe we should change our standard response to the "OMG, I can't handle a 1% drop in the value of my bond fund--aren't individual bonds better?" question.
I commonly say that a bond fund is nothing more or less than a collection of individual bonds. An individual bond portfolio with 20 bonds would behave the same as a bond fund that owned the same 20 bonds. Yet, many people are still very much attracted by the notion of getting their nominal principal back at maturity.
For someone who is interested in Treasuries, CDs, AA and above munis etc., I think I would now say, "Go ahead and buy the individual bonds" A fund of treasury bonds is not fundamentally better than a ladder of individual issues, after all.
Now, most people who buy individual bonds will ultimately end up switching to a fund longer term--sort of like nisiprius dumped his TIPS ladder in favor of the VG TIPS fund. But maybe you really do need to try the individual bond thing first before you figure out that it's really not better than a fund and that the world doesn't end because a bond fund has a temporary decline in NAV.
I commonly say that a bond fund is nothing more or less than a collection of individual bonds. An individual bond portfolio with 20 bonds would behave the same as a bond fund that owned the same 20 bonds. Yet, many people are still very much attracted by the notion of getting their nominal principal back at maturity.
For someone who is interested in Treasuries, CDs, AA and above munis etc., I think I would now say, "Go ahead and buy the individual bonds" A fund of treasury bonds is not fundamentally better than a ladder of individual issues, after all.
Now, most people who buy individual bonds will ultimately end up switching to a fund longer term--sort of like nisiprius dumped his TIPS ladder in favor of the VG TIPS fund. But maybe you really do need to try the individual bond thing first before you figure out that it's really not better than a fund and that the world doesn't end because a bond fund has a temporary decline in NAV.
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Re: Total Bond - SEC yield breaks 3%
Assuming best available CD rates from 5 years ago were at least equal to those in that 2012 post, it looks like to have beaten a 5 year CD over the past 5 years, you would have had to have taken on risk of one kind or another. M* shows these vanguard taxable bond funds as the only ones that have a 5 year return of about 2% or above:triceratop wrote: ↑Tue May 08, 2018 12:08 amKevin M has done many blogposts and forum posts on this topic. An example, among many others.
High-Yield Corporate
Long Term Investment grade
Long Term Corporate Bond Index
Extended Duration Treasury
Long Term Bond Index
Interm Term Corp Bond Index
Long Term Treasury
Interm Term Investment Grade (just under 2% @ 1.95%)
Next after that is short term corp index at 1.57%. Intermediate Treasury is at 0.54% and Total Bond 1.1%.
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Re: Total Bond - SEC yield breaks 3%
I think a lot of the folks attracted to the idea but with no actual experience still need to be reminded that they will no longer have the ability to auto-reinvest interest (unless it's CDs), and won't be buying small amounts every week or two. (A non-issue for those in retirement.)stlutz wrote: ↑Tue May 08, 2018 12:31 am For someone who is interested in Treasuries, CDs, AA and above munis etc., I think I would now say, "Go ahead and buy the individual bonds" A fund of treasury bonds is not fundamentally better than a ladder of individual issues, after all.
Now, most people who buy individual bonds will ultimately end up switching to a fund longer term--sort of like nisiprius dumped his TIPS ladder in favor of the VG TIPS fund. But maybe you really do need to try the individual bond thing first before you figure out that it's really not better than a fund and that the world doesn't end because a bond fund has a temporary decline in NAV.
Re: Total Bond - SEC yield breaks 3%
If you are referring to my question, it wasn't to compare individual ladders to funds; it was to compare bonds (with fluctuating principle) to CDs (with no fluctuating principle). That is, how much does the principle volatility (as a result of interest rate changes) affect the total return?
Kevin's post, demonstrates that a single issue direct CD with low EWP is vastly superior (if you can get these in tax deferred accounts, like an IRA). I think a ladder of brokered CD's would have a similar behavior (with the difference of being better in rising interest rate env, and worse in falling interest rate env).
What I'd really like to see is a simulation of some sort that compares a theoretical CD ladder with a bond fund. I know that several folks here have constructed bond simulators (e.g. longinvest and nisiprius); so perhaps those could be enhanced to simulate a theoretical CD ladder in various interest rate regimes?
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
Re: Total Bond - SEC yield breaks 3%
Good; a little bit of normalcy. Works for me.
Global stocks, US bonds, and time.
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Re: Total Bond - SEC yield breaks 3%
For any who care, here are the current Fidelity brokered CD ladder rates. I love their automated tool, and the rates seem good. I got tired of my AGG and LQD falling more than I was comfortable with and bought a big 2 year CD ladder in my IRA.
Hope I didn't do anything dumb. I usually do.
Hope I didn't do anything dumb. I usually do.
Re: Total Bond - SEC yield breaks 3%
Thanks. Nice and clear chart. I believe I read here that as a rule of thumb, a .2% jump in a year makes it possibly worthwhile, or something like that. Anyway, I have adopted that idea, and see that the 2-year is significantly higher than the 1-year but extending it beyond that doesn't look like as good a deal. Probably won't start something new at Fidelity as we are in the simplifying mode.peterinjapan wrote: ↑Tue May 08, 2018 12:41 pm For any who care, here are the current Fidelity brokered CD ladder rates. I love their automated tool, and the rates seem good. I got tired of my AGG and LQD falling more than I was comfortable with and bought a big 2 year CD ladder in my IRA.
Hope I didn't do anything dumb. I usually do.
Re: Total Bond - SEC yield breaks 3%
No, no, no. The two type of CDs are fundamentally different, and it's the early withdrawal option (EW) that makes all the difference.aj76er wrote: ↑Tue May 08, 2018 11:17 am Kevin's post, demonstrates that a single issue direct CD with low EWP is vastly superior (if you can get these in tax deferred accounts, like an IRA). I think a ladder of brokered CD's would have a similar behavior (with the difference of being better in rising interest rate env, and worse in falling interest rate env).
The EW takes away your interest rate risk, while a brokered CD has the same interest rate risk as a similar duration bond fund (say, Treasuries, to keep the guarantees similar). Switching mid-sentence between the two, or saying like others above that somehow the defined maturity date reduces your interest rate risk, is not only a misunderstanding but obscures the value of the early withdrawal option, which is a difference maker.
Let me repeat: early withdrawal option = true interest rate risk reduction. Defined maturity (as in individual bonds or brokered CDs) = same interest rate risk as funds, and any perceived reduction in interest rate risk is an illusion.
It's easy to see why with an example: if investor A has a fund with 5 year duration, investor B a brokered CD and investor C has cash, and yields in the 5 year range jump 1% tomorrow, both A and B lose about 5% instantly compared to C. Investor B might refuse to look at the market value of the CD (hardly befitting a savvy fixed income investor, but let's say that the illusion matters to them), but investor C can drive home the point by buying 5% more of the exact thing that B owns, leaving him 5% ahead of B thereafter. In coupon terms, investor B is stuck with 3% a year whereas C can get 4% a year right away, at no penalty. This is the very definition of interest rate risk.
And by the way, investor A can also drive home the point by selling their bond fund at 5% loss and buying the same holdings as B at 5% discount, thereafter being in the same position as B. It should be clear by now that B was in the same risk position as A, and in a much worse position than C ("worse" as in, this time).
Compare that to investor D who owned a 5 year 3% CD with a 6-month EWP. They are only 1.5% behind the cash investor C if they use their EW option, so their interest rate risk was indeed much reduced.
Leaving aside the fact that brokered CDs also have fluctuating prices, the fluctuating principal is not what impacts returns. What matters is starting yield (if brokered CDs have an advantage, nobody can argue with that) and duration strategy thereafter. One way in which bond funds / rolling ladders legitimately differ from individual no-EW instruments is that they keep duration constant. That is, 2 years from now the fund or the replenished ladder will still have 5 years duration, whereas a brokered CD will have about 3 years. That might expose the fund to more risk -- and more reward, much like the difference today between a 5 year brokered CD and a 3 year one. But this is the tradeoff we make every day between risk and reward in fixed income, and there's no extra safety than that. Moreover, a bond fund investor can approximate a declining duration instrument pretty reasonably by switching funds towards a target date. If that's what they want.aj76er wrote: ↑Tue May 08, 2018 11:17 am If you are referring to my question, it wasn't to compare individual ladders to funds; it was to compare bonds (with fluctuating principle) to CDs (with no fluctuating principle). That is, how much does the principle volatility (as a result of interest rate changes) affect the total return?
Again, true extra safety comes from being able to get out of the instrument when favorable to you -- and btw, from actually using that option. How many of you are breaking old CDs with EWP to invest at market yields today? I've done a few, but it's still not a slam dunk considering some of my old CDs bought when Total Bond Market yields were below 2% are low duration by now and still reasonable to keep.
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Re: Total Bond - SEC yield breaks 3%
This is a minor point, but with brokered CDs aren't coupons reinvested in the same CD so that the yield held until maturity matches what one expected. There is no guarantee with bonds, since coupons must be reinvested in other bonds.ogd wrote:Defined maturity (as in individual bonds or brokered CDs) = same interest rate risk as funds, and any perceived reduction in interest rate risk is an illusion.
Overall, I agree with your post and found it very clear and helpful.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
Re: Total Bond - SEC yield breaks 3%
Short term Investment Grade Admiral (VFSUX) has an SEC yield of 3.05% and an average duration of 2.6yrs.
1210
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Re: Total Bond - SEC yield breaks 3%
But, at least currently, the brokered CD has a higher yield. Same risk, higher return so the CD = free lunch?
Is this because most invested money is in taxable accounts of people in high tax states? It would require about a 9-13% state income tax rate* to account for the difference between CD and treasury with 2 year or longer maturities. (Meanwhile on the short end, treasuries have higher yields than brokered CDs )
*Probably a bit lower tax rate would do it as the treasury investor would currently be assuming that they will be reinvesting the interest earned at higher rates.
Re: Total Bond - SEC yield breaks 3%
Yeah, this is kind of where I was going. Retirees may soon see rates (bonds and CDs) high enough to put a crimp in the lifestyle of some annuity salespeople.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Total Bond - SEC yield breaks 3%
Only if you can define in advance when you will need the money. Lack of liquidity is the reason for the higher CD yields.jeffyscott wrote: ↑Tue May 08, 2018 3:14 pmBut, at least currently, the brokered CD has a higher yield. Same risk, higher return so the CD = free lunch?
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Total Bond - SEC yield breaks 3%
There are a couple of reasons. State tax is definitely a thing and your rates are realistic in California among others. State tax is more of a thing than it was last year, when it was Fed tax deductible.jeffyscott wrote: ↑Tue May 08, 2018 3:14 pmBut, at least currently, the brokered CD has a higher yield. Same risk, higher return so the CD = free lunch?
Is this because most invested money is in taxable accounts of people in high tax states? It would require about a 9-13% state income tax rate* to account for the difference between CD and treasury with 2 year or longer maturities. (Meanwhile on the short end, treasuries have higher yields than brokered CDs )
But more: Treasuries are very liquid and CDs significantly less. If you don't need the liquidity ever you can imagine yourself selling that lack of need by buying a CD instead of a Treasury. Also, they are guaranteed only to the FDIC limit, so relatively useless to institutional investors since above that they're like a bank bond. And they're somewhat less convenient to buy (a follow-up to the "institutional investors" point, since that means no funds).
Last edited by ogd on Tue May 08, 2018 3:47 pm, edited 1 time in total.
Re: Total Bond - SEC yield breaks 3%
Thanks triceratop! I would classify the inability to invest at same yield as reinvestment risk, it hurts in the opposite situation than interest rate risk, i.e. when yields fall. The same reason why it might be preferable to invest in 5 years vs 3 years when your horizon is longer than 5 years, even when yields are not significantly larger -- 3 years from now you might not be able to find 2 year investments for the rest of the period that are as good as the old 5 year instrument.triceratop wrote: ↑Tue May 08, 2018 2:34 pm This is a minor point, but with brokered CDs aren't coupons reinvested in the same CD so that the yield held until maturity matches what one expected. There is no guarantee with bonds, since coupons must be reinvested in other bonds.
In fact, if reinvestment is not optional, this slightly increases interest rate risk, as the coupons are also stuck earning old yields rather than new yields, just like the principal.
But as you note, this is a minor effect because it's yield-on-yield and small in the grand scheme of things.
Last edited by ogd on Tue May 08, 2018 4:09 pm, edited 2 times in total.
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Re: Total Bond - SEC yield breaks 3%
jalbert -- worth noting that in this article that generally argues that bond ladders can work well, there is no mention of interest rate risk as an advantage for ladders, and the same goes for other articles from Larry's firm. They know what they are talking about and they're quite honest, so despite the fact that they'd get paid for managing your bonds they will not make an argument that they know is not true.
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Re: Total Bond - SEC yield breaks 3%
Agreed. I would also point out that the article's noting that a large RIA firm buys enough volume only to pay 2-4 bp transaction cost on average for bond/CD purchases is a red herring in that individual investors only get to participate in these wholesale purchases because they are paying an asset-under-management fee on the managed assets, including on the bonds/CDs.
Re: Total Bond - SEC yield breaks 3%
Have been holding all fixed income in various CDs and also 401k stable value funds the last 3-5 years and with no total bond. The results have been much better than the 1.38% five-year-return of total bond.
For fixed income I believe there is free lunch for individual investors with bank/credit union CDs, as well as stable value funds.
When the feds announce they are close to/have finished raising rates, I will rotate some of my fixed income back to total bond (or intermediate bond which doesn't have mortgage bonds, and/or inflation protected bonds).
I have learned a lot about bonds from Larry as well as CD advocates such as Kevin on this board.
For fixed income I believe there is free lunch for individual investors with bank/credit union CDs, as well as stable value funds.
When the feds announce they are close to/have finished raising rates, I will rotate some of my fixed income back to total bond (or intermediate bond which doesn't have mortgage bonds, and/or inflation protected bonds).
I have learned a lot about bonds from Larry as well as CD advocates such as Kevin on this board.
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Re: Total Bond - SEC yield breaks 3%
I phased out total bond when the yield became less than my stable value fund. I started back in sometime after it crossed over in the other direction.
In one plan I decided to do a mix of 3 parts stable value to one part vanguard long term bond as a substitute for the bond index. I figured that mix gave me a similar duration to total bond. The 5 year return of my stable value is about 1.9% and VWETX is 3.86%, so the mix was about 2.4% over 5 years.
Elsewhere, to avoid the low government bond yields, used various managed bond funds with varying risks, these all also paid off over the last 5-10 years. As one pretty tame example, DODIX at 2.53% for 5 years and 4.68% for 10 years, beating bond index by over 1%.
The successful bond strategy offset some of the drag from having 40-50% of stock in foreign.
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Re: Total Bond - SEC yield breaks 3%
You will only know the tightening cycle is done when they announce the next rate cut in response to the economic outlook having deteriorated.When the feds announce they are close to/have finished raising rates,
Brokered CDs earn an illiquidity premium over treasuries, not a free lunch.
Direct CDs do have some market inefficiencies. If you are willing to move assets all around the country chasing yield, you can find idiosyncratic situations where institutions are using higher yields to buy their own liquidity when needed.
It is not easy to know if or when stable value funds are a free lunch. You cannot use investment outcomes to substantiate that. It is likely that there were some actual risks that nonetheless did not materialize. These are unquantifiable contributors to risk-adjusted return.