Let's discuss T-Bills now. Which we primarily use as Risk Free Benchmark for Sharpe ratios. In Simba 15d, the data sources are:
- prior to 1972, coarse assumption that 1yr interest rate (from Prof. Shiller, then FRED) provides a decent estimate for T-Bills
- T-Bills 1972-1983
- Vanguard Treasury Money Market Fund (VMPXX) 1984+
- VG Treasury (VMPXX) merged with Admiral Treasury (VUSXX) in Aug 2009
The 1972-83 description wasn't quite specific, but I finally figured out that this came (via indirect means) from SBBI/Ibbotson T-Bills 30-days data series. Ahem.
At the time of the merge between VMPXX and VUSXX, the respective ERs were 0.28% and 0.15% (and VUSXX is now 0.09%), according to the Vanguard press release
(hence a discontinuity in our Simba series). With the recent historically low yields, VMPXX was clearly not sustainable any more. As to VUSXX, its first annual return was in 1993. Note that the average duration for VUSXX bills is 71 days, hence between 2 and 3 months. Oh, and VMPXX is kind of lost in history since the fund disappeared (Morningstar doesn't have a trace any more).
Ok, this all seems pretty clunky and inconsistent. Discussing with Kevin_M, we came up with the idea to use the FRED T-Bill 3-month data series
, which provides corresponding interest rates on a monthly basis starting from 1934. Which is also what Prof. Damodaran uses for his own T-Bill data series (see here
). Prof. Damodaran approximates T-Bills annual return to the arithmetic average of the Jan, Apr, Jul, Oct rates though. It would seem more accurate to do a geometric average. So the plan is to streamline:
- prior to 1934, keep the 1yr interest rate coarse estimate (Prof. Shiller)
- 1934-1992: T-Bills returns as geometric average of Jan, Apr, Jul, Oct rates provided by FRED (TB3MS)
- 1993+: use VUSXX (and use its latest ER to adjust the synthetic returns pre-1993)
As usual, feedback welcome.