Short-term Treasury vs. Limited-Term Tax-Exempt

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Kevin M
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Short-term Treasury vs. Limited-Term Tax-Exempt

Post by Kevin M » Tue Sep 11, 2018 8:57 pm

I've mostly been buying individual Treasuries, CDs and munis with new cash for the last year or so, but I did buy some Vanguard Limited-Term Tax-Exempt Admiral shares, VMLUX, in January 2018. Lately Treasuries have been offering higher taxable-equivalent yield (TEY) than AA/AAA munis for me (marginal tax rates of 27% federal and 8% state) out to two or three-year maturities, so I wondered if a short-term Treasury fund might currently have higher TEY than the limited-term tax-exempt fund. Sure enough, that's the case.

I compared to Vanguard Short-Term Treasury Index Admiral shares, VSBSX, since its portfolio of almost all 1-3 year Treasuries, with average maturity of two years, is closest to my current preference of 2-year Treasury notes (due to shape of yield curve).

SEC yield of VMLUX is 2.00%, which for me is TEY of 2.63% 2.83%, and after-tax yield (ATY) of 1.84%. SEC yield of VSBSX is 2.57%, which is TEY of 2.86% 2.89% and ATY of 2.00% 1.88%.

Not only does VSBSX have significantly slightly higher yield TEY/ATY, but it's safer, with essentially no credit risk and a duration of 1.9 years, compared to VMLUX with some credit risk and duration of 2.5 years.

I'm pretty sure I'm going to exchange most all of my VMLUX to VSBSX. Not only does VSBSX look better from a yield and risk perspective, but I have a relatively small tax loss on VMLUX that I can harvest by doing this exchange.

The only reason I might keep a few shares of VMLUX is that of the last six months of reinvested dividends, there are losses on the most recent three months. The amounts are trivial, but I'd rather not mess around with the tax accounting regarding losses on shares bought within six months.

Inputs always appreciated, in case I'm overlooking something.

Kevin

EDITS: The original TEY and ATY values were based on a friend's federal marginal tax rate of 22%, which I happened to have in my spreadsheet at the time (he also owns VMLUX). I've corrected the values based on my marginal rate of 27% (our marginal state tax rates are the same). VSBSX still has higher TEY/ATY, but only slightly so. Still seems like a good trade, considering the lower risk of VSBSX.

Also struck out the incorrect info about the tax impact of selling shares held less than six months.
Last edited by Kevin M on Wed Sep 12, 2018 2:12 pm, edited 1 time in total.
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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by ofckrupke » Tue Sep 11, 2018 10:30 pm

I did similar recently but was VWSUX -> (5 parts VSBSX + 4 parts VUSXX) to maintain the ~1.1y duration.
Would rather have had a single treasury fund @ 1.1y because of the arch in the curve between 0 and 2 years, but haven't upgraded the account to brokerage form so options were fewer. 27.8%+9.3% rates pretty close to yours.

The only thing you're overlooking is this: VMLUX declares daily and distributes monthly, so there is no impairment of exemption on the dividends when selling short-held shares for loss.

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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by House Blend » Wed Sep 12, 2018 8:57 am

Kevin M wrote:
Tue Sep 11, 2018 8:57 pm
The only reason I might keep a few shares of VMLUX is that of the last six months of reinvested dividends, there are losses on the most recent three months. The amounts are trivial, but I'd rather not mess around with the tax accounting regarding losses on shares bought within six months.
That's a non-issue.

It turns out that if your muni mutual fund accrues dividends daily and does not wrap interest into the NAV, then you can harvest young losses in your shares without having to adjust for the tax-exemption. (Which makes sense, if you understand the intent of this rule.) I believe that the wiki article on tax loss harvesting is up to date on this point. If not there's some old threads on this issue from maybe three years ago where Neurosphere found the exception in the tax code that spells this out.

For some reason this exception to the exception didn't make it into Pub. 550.

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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by indexfundfan » Wed Sep 12, 2018 9:57 am

ofckrupke wrote:
Tue Sep 11, 2018 10:30 pm
The only thing you're overlooking is this: VMLUX declares daily and distributes monthly, so there is no impairment of exemption on the dividends when selling short-held shares for loss.
A related point is that VSBSX's dividend is declared and distributed monthly. So if you buy near to the end of the month, you will be "buying a distribution". The best time, in terms of not buying a distribution, is to do the exchange from VMULX to VSBSX on the last trading day of the month (or early in the month).
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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by Kevin M » Wed Sep 12, 2018 12:29 pm

ofckrupke wrote:
Tue Sep 11, 2018 10:30 pm
The only thing you're overlooking is this: VMLUX declares daily and distributes monthly, so there is no impairment of exemption on the dividends when selling short-held shares for loss.
House Blend wrote:
Wed Sep 12, 2018 8:57 am
It turns out that if your muni mutual fund accrues dividends daily and does not wrap interest into the NAV, then you can harvest young losses in your shares without having to adjust for the tax-exemption. (Which makes sense, if you understand the intent of this rule.) I believe that the wiki article on tax loss harvesting is up to date on this point. If not there's some old threads on this issue from maybe three years ago where Neurosphere found the exception in the tax code that spells this out.

For some reason this exception to the exception didn't make it into Pub. 550.
Thanks to both of you. I had remembered something about this exception, but couldn't find it in the IRS Pubs when I scanned them yesterday. Now I know why. I'm pretty sure I even have posted here about this exception, but it was a few years ago, and I couldn't remember the details.

I believe the reasoning is that if a fund doesn't accrue dividends daily, one could incur a loss simply from the dividend distribution, and the IRS doesn't want you getting the benefit of the tax loss as well as the tax-exempt distribution. For a fund that accrues dividends daily, share price is not reduced by the amount of the dividend distribution, so you don't incur a loss simply because of the dividend distribution.

You can see if your fund accrues dividends daily by looking at the Balances by Date screen (Accrued dividends column).

I believe that Vanguard's bond index funds to not accrue dividends daily, but I don't know how to easily look this up, although I can verify it for the one bond index fund I own (accrued dividends = $0). This doesn't apply to VMLUX though, since it's not an index fund.

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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by Kevin M » Wed Sep 12, 2018 12:40 pm

indexfundfan wrote:
Wed Sep 12, 2018 9:57 am
ofckrupke wrote:
Tue Sep 11, 2018 10:30 pm
The only thing you're overlooking is this: VMLUX declares daily and distributes monthly, so there is no impairment of exemption on the dividends when selling short-held shares for loss.
A related point is that VSBSX's dividend is declared and distributed monthly. So if you buy near to the end of the month, you will be "buying a distribution". The best time, in terms of not buying a distribution, is to do the exchange from VMULX to VSBSX on the last trading day of the month (or early in the month).
Good point, and I believe that this is because VSBSX is an index fund, unlike VMLUX.

So if I did it today, I'd be buying 40% of the September dividend. I'm wondering if this is enough of a negative to hold off for the rest of the month until doing the exchange. Perhaps comparing the estimated tax on 40% of the estimated distribution to the difference in estimated after-tax yields for the rest of the month would be a rational way to approach it.

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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by Kevin M » Wed Sep 12, 2018 2:36 pm

Kevin M wrote:
Wed Sep 12, 2018 12:40 pm
So if I did it today, I'd be buying 40% of the September dividend. I'm wondering if this is enough of a negative to hold off for the rest of the month until doing the exchange. Perhaps comparing the estimated tax on 40% of the estimated distribution to the difference in estimated after-tax yields for the rest of the month would be a rational way to approach it.
After correcting the after-tax yields (see edited OP), I did a rough calculation along these lines, and concluded that it's better to wait until or shortly after the ex-dividend date, which I believe will be 9/28, (day after the dividend record date).

I started with the most recent VSBSX dividend distribution of 0.03340 per share, although the distribution amount has been climbing fairly steadily, so it could be a bit higher. Multiplying that by the number of shares I'd own based on yesterday's NAV values, the estimated dividend distribution would be $119.73, 40% of which is 47.89. The federal tax on that at 27% is $12.93.

Using the after tax SEC yields of 1.84% and 1.88%, the estimated difference in after-tax returns for one month is $2.15, and since I'd hold the fund for 60% of the month, the difference would be about $1.29.

Of course there's significant slop in this, since SEC yields are 30-day averages, yields/prices will change over the rest of the month, etc. Still, the difference between the estimated extra tax and the estimated extra after-tax return is large enough that it seems rational to wait. Of course the comparison will be somewhat different at the end of the month, but given the significant difference in term risk, not to mention some difference in credit risk, I'm thinking that it still will make sense, unless there's a significant increase in the muni yield relative to the Treasury yield.

Kevin
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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by grabiner » Wed Sep 12, 2018 8:58 pm

Kevin M wrote:
Tue Sep 11, 2018 8:57 pm
I've mostly been buying individual Treasuries, CDs and munis with new cash for the last year or so, but I did buy some Vanguard Limited-Term Tax-Exempt Admiral shares, VMLUX, in January 2018. Lately Treasuries have been offering higher taxable-equivalent yield (TEY) than AA/AAA munis for me (marginal tax rates of 27% federal and 8% state) out to two or three-year maturities, so I wondered if a short-term Treasury fund might currently have higher TEY than the limited-term tax-exempt fund. Sure enough, that's the case.
How do you have a 27% federal marginal tax rate? Is it 22% plus a 5% phase-out of the child tax credit? This is unlikely, since the phase-out of the child tax credit was changed to a much higher income level in the new tax law.

Regardless, it makes sense that Treasuries are a better deal than munis, even in this tax bracket, because of that high state tax. Munis would be a better deal if you could use a fund for your state, but Vanguard doesn't have any short-term single-state funds, and the long-term funds may have too much of another type of risk for you even if they do exist. (And they may not; Vanguard doesn't have a MD fund, and T. Rowe Price, which does, charges more in extra expenses than the tax savings.)
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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by ofckrupke » Wed Sep 12, 2018 10:57 pm

Kevin: I fuzzily expect to sell VSBSX eventually for a small loss and to offset ordinary income for both fed and CA taxation in the $3k annual window with that loss, whether in the realization year or thereafter by carryover. As such I don’t mind buying a small, partial month dividend that is state tax exempt(!). YMMV.

David: Kevin is near the top of the 12% bracket and his QDIVs project into the 15% taxation bracket. That’s how his interest income comes to be taxed marginally at 27%. It’s what until TCJA was the 15+15=30% window.

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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by Kevin M » Thu Sep 13, 2018 12:51 pm

grabiner wrote:
Wed Sep 12, 2018 8:58 pm
How do you have a 27% federal marginal tax rate?
ofckrupke wrote:
Wed Sep 12, 2018 10:57 pm
David: Kevin is near the top of the 12% bracket and his QDIVs project into the 15% taxation bracket. That’s how his interest income comes to be taxed marginally at 27%. It’s what until TCJA was the 15+15=30% window.
Pretty much. The only qualification I'd make is that you don't need to be near the top of the 12% bracket--at least I wouldn't state it quite that way.

All that matters is that your QD/LTCG stacked on top of your ordinary income (below the top of the 12% bracket) is at or above the top of the 12% bracket (technically at the top of the 0% QD/LTCG "bracket", which now is slightly different, but close enough that I'll ignore it for discussion purposes). So, you could have lots of QD/LTCG but your ordinary income could be well below the top of the 12% bracket, and you'd still be pushing a dollar of QD/LTCG from 0% to 15% for each dollar of ordinary income taxed at 12%.

Or if you want to consider the entire stack of ordinary income plus QD/LTCG, I'm already above the top of the 12% bracket, but the QD/LTCG is partially below and partially above the top of the 0% QD/LTCG "bracket".
grabiner wrote:
Wed Sep 12, 2018 8:58 pm
Regardless, it makes sense that Treasuries are a better deal than munis, even in this tax bracket, because of that high state tax. Munis would be a better deal if you could use a fund for your state, <snip>
I don't think this is necessarily always true. First, the yield spreads between Treasuries and AAA (and AA) munis changes over time. Second, state munis don't always have higher TEY for me. Third, you need to consider the credit risk of munis, especially with funds that don't stick to AAA or even AA munis, so it's not exactly apples to apples.

I've learned this from my individual muni and Treasury buying experience over the last year or so. Late last year through earlier this year, I was getting decent yield premiums over Treasuries with AA munis and maybe even AAA munis out to 3-year maturity. Now Treasury TEY beats AA munis to 2-year maturity, AAA munis to 3-year maturity, and to beat Treasuries with AA munis, you have to go with outlier high yields, and there's almost certainly probably a credit-risk reason for the high yield.

I almost always got higher TEY with non-CA AA/AAA munis (CA is my state of residence). I think part of the reason for this was a relatively thin market for CA munis compared to looking at all states (at least at Fidelity), but it also could be that the other states are considered riskier than CA; I diversified among quite a few states and stuck with AA/AAA with maturities of three years or less, so pretty comfortable with the risk. I tended to get the better yields on CA munis mostly at shorter maturities.
grabiner wrote:
Wed Sep 12, 2018 8:58 pm
<snip> but Vanguard doesn't have any short-term single-state funds, and the long-term funds may have too much of another type of risk for you even if they do exist.
I have long-term holdings of Vanguard CA intermediate-term and long-term muni funds--I just haven't been adding any new cash to them. Given what I've seen with individual munis, I checked and found that Vanguard Intermediate-Term muni has a significantly higher TEY for me than CA intermediate-term muni, currently at 3.61% compared to 3.42%. Duration of the national fund is slightly lower at 5.2 years compared to 5.3 years for the CA fund, but of course must also consider the relative credit quality.

Code: Select all

CR	VWIUX	VCADX

AAA	22.30%	8.00%
AA	46.50%	71.20%
A	21.50%	14.00%
BBB	7.50%	5.10%
BB	0.30%	0.10%
B	0.50%	0.10%
NR	1.40%	1.50%
The national fund has more in AAA, but the CA fund has more in AAA/AA. If I naively assign numerical values of 0-6 for NR-AAA, the average weighted values for both are the same at 4.76, so a bit below AA (5).

I think they're close enough to not worry much about it.

I have a non-trivial capital gain for the majority of my CA int-term muni shares, which are non-covered using average basis, but I have a small loss for some covered shares, which I might exchange into the national fund. However, it wouldn't be enough for Admiral shares, which would lower my TEY by about 7 basis points, but this is still a TEY yield premium of 12 basis points over the CA admiral shares fund.

Kevin
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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by JackoC » Thu Sep 13, 2018 2:09 pm

One other factor which could come in for muni v treasury, for some people, is taxation of Social Security and determining one's Medicare premium. Both are based on Modified Adjusted Gross Income which adds tax exempt income to Adjusted Gross Income (plus other items in the SS case). Even if muni and treas income are equal on an after tax basis according to tax brackets, the gross interest amount and thus MAGI will still be less using muni's than treasuries. Both issues though would not affect the same taxpayer. Social Security taxation maxes out at MAGI (SS definition), of $34/$44k single/joint; the lowest (simple AGI+tax exempt) joint MAGI that increases Medicare premium is $85/$170k. And it's also probably unusual for muni's to be attractive at MAGI <$44k joint. But for the Medicare case, poking above the $170k MAGI would trigger a $1,644/yr premium increase for two people, 16bps pa. if triggered by shifting $1mil from munis to treasuries, and progressively more bps if a smaller allocation shift triggers it. So it's potentially significant, but the all or nothing aspect makes it difficult to analyze without already knowing the full tax return. It affects the Medicare premium 2 yrs after that tax year, so it first comes into play 2 yrs before you are eligible for Medicare. There are further higher income levels which add additional ~$2k per couple cost at MAGI points some $10's k higher.
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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by michaeljmroger » Tue Nov 27, 2018 11:15 am

Kevin M wrote:
Tue Sep 11, 2018 8:57 pm
I compared to Vanguard Short-Term Treasury Index Admiral shares, VSBSX
Out of curiosity, did you do the same comparison with VFIRX ?

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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by Kevin M » Tue Nov 27, 2018 2:14 pm

michaeljmroger wrote:
Tue Nov 27, 2018 11:15 am
Kevin M wrote:
Tue Sep 11, 2018 8:57 pm
I compared to Vanguard Short-Term Treasury Index Admiral shares, VSBSX
Out of curiosity, did you do the same comparison with VFIRX ?
I did not, as I'd already decided I preferred the index fund (VFIRX is the Vanguard actively-managed short-term Treasury fund). Mostly I prefer the shorter duration of the index fund.

Since you mentioned it, I added it to my comparison spreadsheet. Interestingly, even though VFIRX has longer duration at 2.3 years, compared to 1.8 years for VSBSX, VFIRX has lower SEC yield at 2.72% compared to 2.80% for VSBSX.

I did end up doing the indicated exchange on 9/28 (did not buy the dividend). Yields have risen since then, but VMLUX yield has risen slightly more, so it now has a higher TEY for me than VSBSX:

TEY Fund

3.24% VMLUX
3.14% VSBSX
3.05% VFIRX

Interestingly, even though yields have risen, I have a small capital gain in VSBSX. While yield has risen from 2.67% to 2.80%, price has risen from 19.89 to 19.94. This is an example of how the relationship between price and SEC yield aren't necessarily what you might expect, as I've posted about extensively in previous years. At least part of the explanation is that SEC yield is a lagging 30-day average yield.

If the spread between VMLUX and VSBSX increases enough to justify the extra term risk (and credit risk), and especially if I end up with a tax loss at that point, I might exchange back.

Kevin
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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by michaeljmroger » Tue Nov 27, 2018 2:44 pm

Kevin M wrote:
Tue Nov 27, 2018 2:14 pm
I did not, as I'd already decided I preferred the index fund (VFIRX is the Vanguard actively-managed short-term Treasury fund). Mostly I prefer the shorter duration of the index fund.

Since you mentioned it, I added it to my comparison spreadsheet. Interestingly, even though VFIRX has longer duration at 2.3 years, compared to 1.8 years for VSBSX, VFIRX has lower SEC yield at 2.72% compared to 2.80% for VSBSX.

I did end up doing the indicated exchange on 9/28 (did not buy the dividend). Yields have risen since then, but VMLUX yield has risen slightly more, so it now has a higher TEY for me than VSBSX:

TEY Fund

3.24% VMLUX
3.14% VSBSX
3.05% VFIRX

Interestingly, even though yields have risen, I have a small capital gain in VSBSX. While yield has risen from 2.67% to 2.80%, price has risen from 19.89 to 19.94. This is an example of how the relationship between price and SEC yield aren't necessarily what you might expect, as I've posted about extensively in previous years. At least part of the explanation is that SEC yield is a lagging 30-day average yield.

If the spread between VMLUX and VSBSX increases enough to justify the extra term risk (and credit risk), and especially if I end up with a tax loss at that point, I might exchange back.

Kevin
Fascinating, thank you!

I noticed the portfolio composition is a bit different between VFIRX and VSBSX. The difference is presumably negligible but do you know if one of them is more tax-efficient? I know treasuries are state tax-exempt, but since VSBSX seems to have a slightly higher U.S. Government allocation, I was wondering if that made it more tax-friendly than VFIRX.

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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by Kevin M » Tue Nov 27, 2018 4:03 pm

michaeljmroger wrote:
Tue Nov 27, 2018 2:44 pm
Fascinating, thank you!

I noticed the portfolio composition is a bit different between VFIRX and VSBSX. The difference is presumably negligible but do you know if one of them is more tax-efficient? I know treasuries are state tax-exempt, but since VSBSX seems to have a slightly higher U.S. Government allocation, I was wondering if that made it more tax-friendly than VFIRX.
Good question.

I naively assumed that they would both be 100% exempt from state taxes, but looking at Vanguard's 2017 U. S. Government Obligation information (it's a PDF file), I see that 94.24% of the index fund's income was from US government obligations (USGO), compared to 95.32% for the non-index fund, even though the index fund had a higher percentage of assets in USGO at 97.33% compared to 96.91% for the non-index fund. So apparently one can't go by the percentage of assets in USGO. At any rate, the difference is small enough that it wouldn't factor into my decision.

Another advantage of holding individual Treasuries, although a small one.

Kevin
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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by michaeljmroger » Tue Nov 27, 2018 4:25 pm

Kevin M wrote:
Tue Nov 27, 2018 4:03 pm
Good question.

I naively assumed that they would both be 100% exempt from state taxes, but looking at Vanguard's 2017 U. S. Government Obligation information (it's a PDF file), I see that 94.24% of the index fund's income was from US government obligations (USGO), compared to 95.32% for the non-index fund, even though the index fund had a higher percentage of assets in USGO at 97.33% compared to 96.91% for the non-index fund. So apparently one can't go by the percentage of assets in USGO. At any rate, the difference is small enough that it wouldn't factor into my decision.

Another advantage of holding individual Treasuries, although a small one.

Kevin
Thanks for checking!

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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by indexfundfan » Tue Nov 27, 2018 5:51 pm

Kevin M wrote:
Tue Nov 27, 2018 2:14 pm
Interestingly, even though yields have risen, I have a small capital gain in VSBSX. While yield has risen from 2.67% to 2.80%, price has risen from 19.89 to 19.94. This is an example of how the relationship between price and SEC yield aren't necessarily what you might expect, as I've posted about extensively in previous years. At least part of the explanation is that SEC yield is a lagging 30-day average yield.
Are you looking at the same point in the month? The "gain" you are seeing could just be the undistributed dividend from VSBSX. Remember, unlike VFIRX, when VSBSX distributes its dividends, its price drops by the same amount. On Oct 31, it distributed 3.5 cents. It will probably distribute around 4 cents at the end of this month.
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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by Kevin M » Tue Nov 27, 2018 6:13 pm

Kevin M wrote:
Tue Nov 27, 2018 2:14 pm
Interestingly, even though yields have risen, I have a small capital gain in VSBSX. While yield has risen from 2.67% to 2.80%, price has risen from 19.89 to 19.94. This is an example of how the relationship between price and SEC yield aren't necessarily what you might expect, as I've posted about extensively in previous years. At least part of the explanation is that SEC yield is a lagging 30-day average yield.
I thought it would be interesting to explore this in some detail. Keep in mind that share price is based on yields that day, while SEC yield is a lagging 30-day average. Also keep in mind that the fund holds mostly Treasuries in the 1-year to 3-year range, with an average maturity of 1.9 years.

Below is a chart of the 1-year, 2-year and 3-year (constant maturity) Treasury yields from 8/27/2018 through 11/22/2018 (latest available at FRED as of now). I started at 8/27 since that enables use to look at the yields that would be used in computing 30-day lagging average yields as of my purchase date of 9/28.

Image

We can see that yields increased from 8/28 to 9/28, so the 30-day average yields were lower than the yields on 9/28, and the share price would have been low in relationship to SEC yield, since the yields the price was based on were higher than the 30-day averages used to calculate the SEC yield.

We can also see that the 2-year and 3-year yields weren't that much different at the end of the period than on 9/28, although the 1-year yield increased. Although not shown in the chart, we can get the yields as of 11/26 from the Treasury.gov CMT site. The 2-year yield increased only 3 basis points from 9/28 - 11/26, the 3-year yield actually was 2 basis points lower, and the 1-year yield increased by 11 basis points.

We also see that the yields were higher for much of the 30 days before 11/26, especially the 2-year and 3-year yields, which would tend to inflate the SEC yield relative to the yields used to compute the share price on 11/26. So here price was high in relationship to SEC yield.

To summarize, we had a beginning price that was low relative to SEC yield, an ending price that was high relative to SEC yield, and the yields of the longer-duration notes in the fund either decreasing or increasing only slightly. The notes also had decreased in maturity by almost two months, providing a bit of rolldown return boost, especially for the longer duration notes in the fund. This seems to explain the share price increase despite the SEC yield increase from 9/28 through 11/26.

Below are some numbers for those who might want to work through this in more detail. The third row contains the 30-day trailing averages of the yields as of 9/28, the sixth row ditto as of 11/26, and the last row are the yield changes from 9/28 to 11/26. The "Minus ER" column are the average yields minus the fund ER of 7 basis points, and the SEC column shows the SEC yields on 9/28 and 11/26.

Code: Select all

Date	        1y	2y	3y	Avg	Minus 	SEC
                                    		ER	
08/28/18	2.47	2.67	2.73	2.62	2.55	
09/28/18	2.59	2.81	2.88	2.76	2.69	
30 day avg	2.55	2.75	2.82	2.71	2.64	2.67
10/26/18	2.63	2.81	2.85	2.76	2.69	
11/26/18	2.70	2.84	2.86	2.80	2.73	
30 day avg	2.69	2.86	2.92	2.82	2.75	2.80
11/26 – 09/28	0.11	0.03	-0.02			
Kevin
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Kevin M
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Re: Short-term Treasury vs. Limited-Term Tax-Exempt

Post by Kevin M » Tue Nov 27, 2018 6:22 pm

indexfundfan wrote:
Tue Nov 27, 2018 5:51 pm
Kevin M wrote:
Tue Nov 27, 2018 2:14 pm
Interestingly, even though yields have risen, I have a small capital gain in VSBSX. While yield has risen from 2.67% to 2.80%, price has risen from 19.89 to 19.94. This is an example of how the relationship between price and SEC yield aren't necessarily what you might expect, as I've posted about extensively in previous years. At least part of the explanation is that SEC yield is a lagging 30-day average yield.
Are you looking at the same point in the month? The "gain" you are seeing could just be the undistributed dividend from VSBSX. Remember, unlike VFIRX, when VSBSX distributes its dividends, its price drops by the same amount. On Oct 31, it distributed 3.5 cents. It will probably distribute around 4 cents at the end of this month.
That's a good point too, since I bought the fund the day after the dividend record date of 9/27 (to avoid buying the dividend), but most of this month's dividend is embedded in the current price. In this case you'd still have an apparent disconnect between SEC yield increasing by 13 basis points with price remaining basically flat (or increasing slightly). That makes it even easier for all the other stuff I just posted to explain the remaining apparent anomaly, since we can explain part of it with the undistributed dividend.

Kevin
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