Short Term Bond yield over 3%

[David Jay]

I was in my accounts today and noticed that the SEC yield on the Vanguard Short Term Bond Fund (Admiral: VBIRX) is 3.01%

This is the fund where I am holding our living expenses for the first next two years of retirement (out years are in intermediate term).

[Munir]

I was in my accounts today and noticed that the SEC yield on the Vanguard Short Term Bond Fund (Admiral: VBIRX) is 3.01%

This is the fund where I am holding our living expenses for the first next two years of retirement (out years are in intermediate term).

What are its Total Return numbers? High yield bonds also have high SEC yields.

[Yankuba]

TSP G Fund is at 3% as well. And on the rise!

[KlangFool]

OP,

Please explain to me why folks are paying off the fixed-rate low-interest mortgage when the interest rate is going up. At the rate of interest rate increases, cash in the money market fund may pay a higher interest rate than their mortgages in the future.

KlangFool

[feh]

Which is why I'll be putting most of the proceeds from my recently matured NWFCU CD into VFSUX instead of another CD.

[David Jay]

OP,

Please explain to me why folks are paying off the fixed-rate low-interest mortgage when the interest rate is going up. At the rate of interest rate increases, cash in the money market fund may pay a higher interest rate than their mortgages in the future.

KlangFool

It’s now my job to explain other people’s decisions?

I have a hard enough time explaining MY OWN decisions to my spouse!

[ThrustVectoring]

OP,

Please explain to me why folks are paying off the fixed-rate low-interest mortgage when the interest rate is going up. At the rate of interest rate increases, cash in the money market fund may pay a higher interest rate than their mortgages in the future.

KlangFool

People don't really realize that a mortgage is equivalent to shorting a long-term bond with an embedded call option to close out the position via refinancing/sale. Accelerating the mortgage only really makes sense when interest rates remain flat or decrease somewhat (but not enough to make refinancing worthwhile).

[PugetSoundguy]

KlangFool wrote: ↑Tue Oct 09, 2018 4:06 pm
OP,

Please explain to me why folks are paying off the fixed-rate low-interest mortgage when the interest rate is going up. At the rate of interest rate increases, cash in the money market fund may pay a higher interest rate than their mortgages in the future.

KlangFool

Yes, I am getting increasingly urgent communications from our mortgage lender that now is an excellent, no, vital, time to refinance our 2.75% mortgage. Lower monthly payments are promised in bold type! Somewhere in the fine print is the higher interest rate and longer term.

[gtwhitegold]

KlangFool wrote: ↑Tue Oct 09, 2018 4:06 pm
OP,

Please explain to me why folks are paying off the fixed-rate low-interest mortgage when the interest rate is going up. At the rate of interest rate increases, cash in the money market fund may pay a higher interest rate than their mortgages in the future.

KlangFool

Yes, I am getting increasingly urgent communications from our mortgage lender that now is an excellent, no, vital, time to refinance our 2.75% mortgage. Lower monthly payments are promised in bold type! Somewhere in the fine print is the higher interest rate and longer term.

Same here. My PMI ends next month and the salesman tried using PMI as a reason to refinance. I told him that he can call me back if he can offer me a 20 year mortgage with a lower interest rate than I am currently paying. I seriously doubt that I will ever refinance. It will be hard to find a compelling reason to.

[catalina355]

I was in my accounts today and noticed that the SEC yield on the Vanguard Short Term Bond Fund (Admiral: VBIRX) is 3.01%

This is the fund where I am holding our living expenses for the first next two years of retirement (out years are in intermediate term).

I am using ST Bond Index for the same reason. Which intermediate fund are you using? With the increased duration of intermediate funds I am beginning to think I may move entirely to ST Bond Index.

[willthrill81]

KlangFool wrote: ↑Tue Oct 09, 2018 4:06 pm
OP,

Please explain to me why folks are paying off the fixed-rate low-interest mortgage when the interest rate is going up. At the rate of interest rate increases, cash in the money market fund may pay a higher interest rate than their mortgages in the future.

KlangFool

Yes, I am getting increasingly urgent communications from our mortgage lender that now is an excellent, no, vital, time to refinance our 2.75% mortgage. Lower monthly payments are promised in bold type! Somewhere in the fine print is the higher interest rate and longer term.

We have gotten a couple of those this year as well. Even though it's probably sub-optimal, we're aggressively paying down our mortgage and are only about 18 months away from the party.

[JDDS]

Which is why I'll be putting most of the proceeds from my recently matured NWFCU CD into VFSUX instead of another CD.

I thought about doing this too, based on the SEC yield. I was less convinced when I saw the fund (not unexpectedly) had lost 3% in NAV this year. If fed hikes keep on pace, will similar happen in the next year?

[JoMoney]

It will be interesting to see what the combined rate on Series I Savings Bonds are next month.

[mc2]

I was in my accounts today and noticed that the SEC yield on the Vanguard Short Term Bond Fund (Admiral: VBIRX) is 3.01%

This is the fund where I am holding our living expenses for the first next two years of retirement (out years are in intermediate term).

I am using ST Bond Index for the same reason. Which intermediate fund are you using? With the increased duration of intermediate funds I am beginning to think I may move entirely to ST Bond Index.

Hi there-

Are you stating that short term would be better than intermed given the projection of increasing rates in the future? I have my emergency funds in VG Tax exempt st bond fund-VWSTX. Is that ok?

Cheers-
mc2

[Kevin8696]

I was in my accounts today and noticed that the SEC yield on the Vanguard Short Term Bond Fund (Admiral: VBIRX) is 3.01%

This is the fund where I am holding our living expenses for the first next two years of retirement (out years are in intermediate term).

David Jay,

A limitation of the SEC yield... you will only realize that 3.01% return if the prices of the bonds in that portfolio remain constant. Might want to check the YTD total return for that fund... it is -0.23% as of 10/10/18, and will likely get worse as rates/yields increase.

The cash distribution yield for VBIRX is currently 2.12%, compared to 2.16% SEC yield for Prime Money Mkt (VMMXX)... with no interest rate risk.

[villars]

I was in my accounts today and noticed that the SEC yield on the Vanguard Short Term Bond Fund (Admiral: VBIRX) is 3.01%

Correct me if I'm wrong. But the only way the yield goes up on a bond fund in one day is if the price of the fund has dropped. It is not like the fund manager just purchased lots of new bonds at a higher interest rate. So it really is not something to be happy about. You probably lost money yesterday.

Now buying more of that fund with *new* money has just become a better deal.

[DartThrower]

I don't mind a loss in my short term bond portfolio at all. I consider it an "insurance premium" for protecting my overall portfolio in case of a large stock pullback. In addition I know that I will be holding onto the fund long enough for the higher yield to benefit me. So I say let the nickel and dime losses happen. I still sleep great at night because of that fund.

[feh]

In addition I know that I will be holding onto the fund long enough for the higher yield to benefit me.

+1

If you're holding onto the funds for 2-3+ years, there's no reason to be concerned about short term fluctuations in the NAV.

[Nowizard]

Why Short Term Bond Index rather than Short Term Investment Bond Index (VFSUX)?
Tim

[S_Track]

I was in my accounts today and noticed that the SEC yield on the Vanguard Short Term Bond Fund (Admiral: VBIRX) is 3.01%

Correct me if I'm wrong. But the only way the yield goes up on a bond fund in one day is if the price of the fund has dropped. It is not like the fund manager just purchased lots of new bonds at a higher interest rate. So it really is not something to be happy about. You probably lost money yesterday.

Now buying more of that fund with *new* money has just become a better deal.

That is an interesting question. Money is coming in and out of the bond everyday so I would imagine the fund manger would have to purchase bonds daily if the intake was greater than the outtake. What happens if the funds recieves a large amount of new money, does the average duration of the fund change?

[Kevin M]

Which is why I'll be putting most of the proceeds from my recently matured NWFCU CD into VFSUX instead of another CD.

Yield on 2-year new-issue CD now is 3.00%. Taxable-equivalent yield (TEY) on 2-year Treasury could be even higher, depending on your state income tax rate (it is higher for me). Duration of VBIRX (mentioned in OP) is 2.7 years and average effective maturity is 2.8 years. So the CD (or possibly Treasury) has higher yield, less term risk, and no credit risk. VFSUX has higher yield, slightly lower duration, but more credit risk than VBIRX.

Short-Term Treasury Index Admiral with SEC yield of 2.75% is TEY for me of 3.09%. Duration is 1.9 years. I own some of this fund in taxable, but it's only a small portion of my fixed income.

Today I saw a 17.7-month Treasury at Schwab with a yield of 2.790%, which for me is TEY of 3.133%). I saw an 11.6-month Treasury at 2.649% which for me is TEY of 2.975%.

My wife and I are buying short-term Treasuries with the proceeds of our matured NWFCU CDs.

To be fair to the funds, SEC yield for bond funds is a lagging 30-day average yield to maturity, so understates the current YTM (net of expenses) when yields are rising as they have been.

Kevin

[NoHeat]

. Money is coming in and out of the bond everyday so I would imagine the fund manger would have to purchase bonds daily if the intake was greater than the outtake. What happens if the funds recieves a large amount of new money, does the average duration of the fund change?

VBIRX holds Treasury notes, which are extremely liquid. The fund manager should have no problem dealing with cash inflows or outflows.

Some mutual funds trade derivatives such as futures, rather than a multitude of individual securities, to deal with daily fluctuations in inflow or outflow, while maintaining their desired exposure to indices.

[WhiteMaxima]

cool. I pull all my equity into 3% bond. what' the credit rating of these bonds. AAA? or BB+

[Munir]

Why Short Term Bond Index rather than Short Term Investment Bond Index (VFSUX)?
Tim

VFSUX's proper name is Vanguard Short-Term Investment-Grade Fund (Admiral Shares). I don't think it's an index fund.

[Chesterfield]

Pls remind me again, are Treasury bond funds are only state tax exempt correct, not federal tax exempt?
Can you provide a quick calculations for hypothetical TEY for Treasury Admiral using personal 5% state income tax rate and 25% federal tax rate VS current yield on CD? Thanks.

Which is why I'll be putting most of the proceeds from my recently matured NWFCU CD into VFSUX instead of another CD.

Yield on 2-year new-issue CD now is 3.00%. Taxable-equivalent yield (TEY) on 2-year Treasury could be even higher, depending on your state income tax rate (it is higher for me). Duration of VBIRX (mentioned in OP) is 2.7 years and average effective maturity is 2.8 years. So the CD (or possibly Treasury) has higher yield, less term risk, and no credit risk. VFSUX has higher yield, slightly lower duration, but more credit risk than VBIRX.

Short-Term Treasury Admiral with SEC yield of 2.75% is TEY for me of 3.09%. Duration is 1.9 years. I own some of this fund in taxable, but it's only a small portion of my fixed income.

Today I saw a 17.7-month Treasury at Schwab with a yield of 2.790%, which for me is TEY of 3.133%). I saw an 11.6-month Treasury at 2.649% which for me is TEY of 2.975%.

My wife and I are buying short-term Treasuries with the proceeds of our matured NWFCU CDs.

To be fair to the funds, SEC yield for bond funds is a lagging 30-day average yield to maturity, so understates the current YTM (net of expenses) when yields are rising as they have been.

Kevin

[catalina355]

I was in my accounts today and noticed that the SEC yield on the Vanguard Short Term Bond Fund (Admiral: VBIRX) is 3.01%

This is the fund where I am holding our living expenses for the first next two years of retirement (out years are in intermediate term).

I am using ST Bond Index for the same reason. Which intermediate fund are you using? With the increased duration of intermediate funds I am beginning to think I may move entirely to ST Bond Index.

Hi there-

Are you stating that short term would be better than intermed given the projection of increasing rates in the future? I have my emergency funds in VG Tax exempt st bond fund-VWSTX. Is that ok?

Cheers-
mc2

There are many different views on where to keep emergency funds. One issue is that different people define an "emergency" in different ways. I would search the forum and this will give you exposure to the different views.

[catalina355]

Why Short Term Bond Index rather than Short Term Investment Bond Index (VFSUX)?
Tim

One reason some people prefer ST Bond Index is that it has less credit risk since 65% of the holdings are Treasury and Agency bonds.

[catalina355]

Short-Term Treasury Admiral with SEC yield of 2.75% is TEY for me of 3.09%. Duration is 1.9 years. I own some of this fund in taxable, but it's only a small portion of my fixed income.

Kevin

Why do you prefer ST Treasury to ST Treasury Index?

[Kevin M]

Short-Term Treasury Index Admiral with SEC yield of 2.75% is TEY for me of 3.09%. Duration is 1.9 years. I own some of this fund in taxable, but it's only a small portion of my fixed income.

Why do you prefer ST Treasury to ST Treasury Index?

Typo. Fixed.

I prefer the index fund since duration is shorter, and it holds only bonds in the 1-3 year maturity range.

Kevin

[Kevin M]

Pls remind me again, are Treasury bond funds are only state tax exempt correct, not federal tax exempt?

Correct.

Can you provide a quick calculations for hypothetical TEY for Treasury Admiral using personal 5% state income tax rate and 25% federal tax rate VS current yield on CD? Thanks.

There is no 25% federal tax bracket in 2018. Also, what matters are your marginal tax rates, not your tax bracket. My federal tax bracket is 12% but marginal tax rate is 27% due to qualified dividends being pushed from 0% to 15% rate on marginal ordinary income.

If you don't get a deduction for state income tax on Schedule A, TEY for a Treasury = y * (1-f) / (1-f-s). Using marginal federal and state rates of 22% and 5%, with SEC yield of Short-Term Treasury Index Admiral at 2.76%:

TEY = 2.76% * (1-22%) / (1 - 22% - 5%) = 2.95%.

However, since SEC yield is a trailing 30-day average of YTM, the current YTM is higher, since rates have risen over the last month. The 2-year yield has increased about 10 basis points. TEY of the fund at given tax rates probably is close to 3% now, which is the high yield of a new-issue 2-year brokered CD.

Kevin

[Chesterfield]

Pls remind me again, are Treasury bond funds are only state tax exempt correct, not federal tax exempt?

Correct.

Can you provide a quick calculations for hypothetical TEY for Treasury Admiral using personal 5% state income tax rate and 25% federal tax rate VS current yield on CD? Thanks.

There is no 25% federal tax bracket in 2018. Also, what matters are your marginal tax rates, not your tax bracket. My federal tax bracket is 12% but marginal tax rate is 27% due to qualified dividends being pushed from 0% to 15% rate on marginal ordinary income.

If you don't get a deduction for state income tax on Schedule A, TEY for a Treasury = y * (1-f) / (1-f-s). Using marginal federal and state rates of 22% and 5%, with SEC yield of Short-Term Treasury Index Admiral at 2.76%:

TEY = 2.76% * (1-22%) / (1 - 22% - 5%) = 2.95%.

However, since SEC yield is a trailing 30-day average of YTM, the current YTM is higher, since rates have risen over the last month. The 2-year yield has increased about 10 basis points. TEY of the fund at given tax rates probably is close to 3% now, which is the high yield of a new-issue 2-year brokered CD.

Kevin

As always, Kevin, you're so helpful w/ bonds stuff. Thanks.

[Doc]

Short-Term Treasury Index Admiral with SEC yield of 2.75% is TEY for me of 3.09%. Duration is 1.9 years. I own some of this fund in taxable, but it's only a small portion of my fixed income.

Why do you prefer ST Treasury to ST Treasury Index?

Typo. Fixed.

I prefer the index fund since duration is shorter, and it holds only bonds in the 1-3 year maturity range.

Kevin

FWIW:

The portfolio switched from the Bloomberg Barclays U.S. 1–3 Year Government Float Adjusted Index to the Bloomberg Barclays U.S. Treasury Bond 1–3 Year Term Treasury Float Adjusted Index in December 2017, but the two indexes are nearly identical. Treasuries already accounted for more than 90% of the prior index. The principal benefit of the change is that it reduces transaction costs, as supplies of agency debt, which account for the remaining 10% of the previous index, have been rapidly falling. The management team maintained tight index tracking throughout the transition.

A duration difference of 1.93 to 2.14 is hardly enough to be a factor.

I guess maybe I am guilty of being in the same position as Kevin since I use Schwab Short-Term US Treasury ETF™ SCHO (also 1-3 index) which has a (very) slightly lower ER than the Vg index fund.

[Kevin M]

Short-Term Treasury Index Admiral with SEC yield of 2.75% is TEY for me of 3.09%. Duration is 1.9 years. I own some of this fund in taxable, but it's only a small portion of my fixed income.

Why do you prefer ST Treasury to ST Treasury Index?

Typo. Fixed.

I prefer the index fund since duration is shorter, and it holds only bonds in the 1-3 year maturity range.

Kevin

FWIW:

The portfolio switched from the Bloomberg Barclays U.S. 1–3 Year Government Float Adjusted Index to the Bloomberg Barclays U.S. Treasury Bond 1–3 Year Term Treasury Float Adjusted Index in December 2017, but the two indexes are nearly identical. Treasuries already accounted for more than 90% of the prior index. The principal benefit of the change is that it reduces transaction costs, as supplies of agency debt, which account for the remaining 10% of the previous index, have been rapidly falling. The management team maintained tight index tracking throughout the transition.

A duration difference of 1.93 to 2.14 is hardly enough to be a factor.

I guess maybe I am guilty of being in the same position as Kevin since I use Schwab Short-Term US Treasury ETF™ SCHO (also 1-3 index) which has a (very) slightly lower ER than the Vg index fund.

Don't know what the index change has to do with what we're talking about, which is the Vanguard short-term Treasury fund vs. the short-term Treasury index fund. The former is actively managed, and the minimum for Admiral shares is $50K, vs $10K for the index fund. Duration of the index fund is 1.9 years, and for the managed fund it's 2.2 years. Agree it's not a big deal though.

The index fund holds 99.7% in the 1-3 year range, with 0.3% under one year. The 0.3% is in AAA, not government, so probably short-term securities for liquidity purposes.

The actively-managed fund holds 12.4% under 1-year, 78.9% in 1-3 years, 6.9% in 3-5 years, and the rest in 5-10 years. And 3.7% is in not-rated bonds.

I don't really want anything less than 6-month or more than 2-year maturity, so the index fund comes closer to what I want. I'm putting much more into individual Treasuries than I have in the fund.

Kevin

[Doc]

I don't really want anything less than 6-month or more than 2-year maturity, so the index fund comes closer to what I want. I'm putting much more into individual Treasuries than I have in the fund.

OK, so you know more than the management team at Vanguard Short Term Treasury fund and go with the lower duration of 2-1/2 months.

The $50k minimum for Admiral shares is a valid consideration but you didn't use it as a reason in your post.

The difference in actual portfolio holdings was changed less than 12 months ago. What will the difference be next January?

I don't really want anything less than 6-month or more than 2-year maturity, so the index fund comes closer to what I want. I'm putting much more into individual Treasuries than I have in the fund.

OK so you don't really like either of them.

[KJVanguard]

What are its Total Return numbers? High yield bonds also have high SEC yields.

Past returns would be low as interest rates have been rising (thus bond prices falling).

There was a time when I would never have imagined that 3.01% would be called "high." Those were the good old days -- back when bonds paid interest, and quite a bit of it at that. Now 3% is high!

My ST Investment Grade Admiral was up to 3.32% I think when I looked yesterday. I was happy to see what would pass for a decent yield after suffering though such a long period when bonds virtually paid nothing. Still basically nothing after taxes & inflation. I'm still trying to figure out the great mystery of how we can have a $20T debt (great demand for money) yet interest rates (the price of money) are still so darn low. What am I missing?

[Soon2BXProgrammer]

OP,

Please explain to me why folks are paying off the fixed-rate low-interest mortgage when the interest rate is going up. At the rate of interest rate increases, cash in the money market fund may pay a higher interest rate than their mortgages in the future.

KlangFool

I bought a house in 2008, and paid it off in 2015. Psychologically, paying it off was the best thing i could ever do. My bare bones cash needs are abysmally low. While in retrospect, i could borrow the money and lend it back to the bank for more money, knowing that its paid off (as well as all of our other assets), sets my living expenses floor very low. at the time of payoff, it did represent a decent chunk of my net worth, which in retrospect, maybe wasn't the best. but now it is 25% of my net worth and falling.

It is all in my head, the benefits that is.

[dknightd]

Are short term bonds really paying 3% ? I assume that is for individual bonds, not a bond fund

edit: Come back in a year and let us know how much your short term bond actually earned. thanks

[WhiteMaxima]

Excellent. Am looking forward to 3.5%.

[feh]

Are short term bonds really paying 3% ? I assume that is for individual bonds, not a bond fund

Yes, they are. Look at M* for yourself.

[KlangFool]

OP,

Please explain to me why folks are paying off the fixed-rate low-interest mortgage when the interest rate is going up. At the rate of interest rate increases, cash in the money market fund may pay a higher interest rate than their mortgages in the future.

KlangFool

I bought a house in 2008, and paid it off in 2015. Psychologically, paying it off was the best thing i could ever do. My bare bones cash needs are abysmally low. While in retrospect, i could borrow the money and lend it back to the bank for more money, knowing that its paid off (as well as all of our other assets), sets my living expenses floor very low. at the time of payoff, it did represent a decent chunk of my net worth, which in retrospect, maybe wasn't the best. but now it is 25% of my net worth and falling.

It is all in my head, the benefits that is.

Soon2BXProgrammer,

Whatever you do, just make sure that you do not end up taking a more expensive student loan for your kids. Or, remortgage the house at a higher rate.

KlangFool

[JoMoney]

Are short term bonds really paying 3% ? I assume that is for individual bonds, not a bond fund

edit: Come back in a year and let us know how much your short term bond earned. thanks

They are paying roughly 3% "coupons" / dividends on new investments. People who already own them are getting the rate they bought at. If you manage your bond portfolio to model a ladder of bonds of similar duration looking at a single year doesn't make sense (unless your bond portfolio will mature in one year).

[dknightd]

Are short term bonds really paying 3% ? I assume that is for individual bonds, not a bond fund

edit: Come back in a year and let us know how much your short term bond earned. thanks

They are paying roughly 3% "coupons" / dividends on new investments. People who already own them are getting the rate they bought at. If you manage your bond portfolio to model a ladder of bonds of similar duration looking at a single year doesn't make sense (unless your bond portfolio will mature in one year).

Which makes me wonder. If you wanted to pay next years bills would you put you money in Money Market, or short term bond fund.
I tried this experiment, YTD MM is ahead of short term bond fund. Next year might be different.

[feh]

Which makes me wonder. If you wanted to pay next years bills would you put you money in Money Market, or short term bond fund.
I tried this experiment, YTD MM is ahead of short term bond fund. Next year might be different.

When I buy short term bond funds, I plan on holding them for at least the average duration, so they wouldn't be an option in this case.

[JoMoney]

Are short term bonds really paying 3% ? I assume that is for individual bonds, not a bond fund

edit: Come back in a year and let us know how much your short term bond earned. thanks

They are paying roughly 3% "coupons" / dividends on new investments. People who already own them are getting the rate they bought at. If you manage your bond portfolio to model a ladder of bonds of similar duration looking at a single year doesn't make sense (unless your bond portfolio will mature in one year).

Which makes me wonder. If you wanted to pay next years bills would you put you money in Money Market, or short term bond fund.
I tried this experiment, YTD MM is ahead of short term bond fund. Next year might be different.

If I could find a short-term bond fund with an average duration of less than a year, I might consider it, especially if I wasn't certain when I would need the money other than roughly about a year out but might roll from one year to the next. I could also imagine a scenario of mixing a MM and a very small amount of a short-term bond fund to simulate a ladder that with a duration of about 6 months and gradually reducing it like a "glide path" over the year until it got to the point that all the money was needed... but that might be more effort than I'm willing to do for marginal rate improvement and I'd just use the MM fund, CDs, or individual bonds with the right maturity.

[Soon2BXProgrammer]

OP,

Please explain to me why folks are paying off the fixed-rate low-interest mortgage when the interest rate is going up. At the rate of interest rate increases, cash in the money market fund may pay a higher interest rate than their mortgages in the future.

KlangFool

I bought a house in 2008, and paid it off in 2015. Psychologically, paying it off was the best thing i could ever do. My bare bones cash needs are abysmally low. While in retrospect, i could borrow the money and lend it back to the bank for more money, knowing that its paid off (as well as all of our other assets), sets my living expenses floor very low. at the time of payoff, it did represent a decent chunk of my net worth, which in retrospect, maybe wasn't the best. but now it is 25% of my net worth and falling.

It is all in my head, the benefits that is.

Soon2BXProgrammer,

Whatever you do, just make sure that you do not end up taking a more expensive student loan for your kids. Or, remortgage the house at a higher rate.

KlangFool

Agreed. We are debt free and have no plan to borrow money again. For kids, we have about 70% of in state total cost of attendance set aside. Ideally we would like to get that to about 80% prefunded, but currently aren't making any contributions, and will let the accounts and cost of tuition float for a few years. As we don't want to get in an overfunded state. we plan to cover the gap between 80-100% if our income at the time allows.

[GAAP]

OP,

Please explain to me why folks are paying off the fixed-rate low-interest mortgage when the interest rate is going up. At the rate of interest rate increases, cash in the money market fund may pay a higher interest rate than their mortgages in the future.

KlangFool

One reason might be the cash-flow differences depending upon your personal situation. For example, a 30-year, 3% mortgage on $100,00 would cost $422/month. If you're a retiree or near-retiree, that's probably more than you would be willing to withdraw from your portfolio.

Keep in mind also that the return from paying down the mortgage is tax-free while the return from the money market fund is not -- that effect will vary depending on the marginal tax rate.

Consider also that the people most likely to be able to pay off the mortgage are those closer to retirement, combine the other two factors, and it can easily make sense for a certain subset of people -- leaving out any emotional/philosophical feelings about debt that can also apply.

[Kevin M]

I don't really want anything less than 6-month or more than 2-year maturity, so the index fund comes closer to what I want. I'm putting much more into individual Treasuries than I have in the fund.

OK, so you know more than the management team at Vanguard Short Term Treasury fund and go with the lower duration of 2-1/2 months.

Yes--they know nothing about my personal risk aversion and preferences for risk/return trade-offs.

As I acknowledged, the difference in duration between the funds is not that big of a deal.

The difference in actual portfolio holdings was changed less than 12 months ago. What will the difference be next January?

The index fund changed from one 1-3 year benchmark to another 1-3 year benchmark.

The benchmark for the actively-manged fund is Bloomberg Barclays U.S. 1-5 Year Treasury Bond Index. As an actively-managed fund, they could make even more significant changes than the index fund.

Finally, the opportunities relative to my risk/return tastes could be different in a few months as well. About a year ago I was buying mainly 1-3 year AA/AAA municipal bonds in taxable, but Treasuries became more attractive relative to munis since then. I'd rather buy Treasuries, since it's much easier, they're safer, and they're much more liquid, but if AA/AAA munis are offering enough of a yield premium, I'll consider them.

As you know, I was buying mainly direct CDs, even in taxable, when the yield premiums over Treasuries were 100 basis points or more. Things change.

I don't really want anything less than 6-month or more than 2-year maturity, so the index fund comes closer to what I want. I'm putting much more into individual Treasuries than I have in the fund.

OK so you don't really like either of them.

Not as much as I like individual Treasuries in my preferred maturity range, which is why I've put much more into individual Treasuries, and will continue to add to them with proceeds of maturing direct CDs in taxable as long as they look attractive to me. I don't remember exactly why I bought a relatively small amount of the fund--I think I was just being lazy, and wanted to chuck some into a fund at the time. It would be the fund I would be adding to if I wanted to use only funds for new cash.

A year ago I might have preferred limited-term tax-exempt (VMLUX) if I weren't buying individual munis, but now my TEY is slightly higher for VSBSX, and duration is shorter at 1.9 years compared to 2.5 years for VMLUX. Higher TEY, less term risk, and less credit risk--win, win, win. If I had bought VMLUX a year ago, I would harvest the tax loss (more significant if not reinvesting dividends), and exchange into VSBSX now.

Kevin

[Munir]

I am confused. When we compare intermediate bond funds, we look at their total return and not just at their yield. Are short term bond funds any different?

A related question: In an IRA, what produces a higher total return- Money Market Prime or the Federal Funds money market vehicle? The MM prime has a slightly higher yield but also a higher expense ratio. Taxes are not an issue since this is an IRA.

[Kevin M]

Are short term bonds really paying 3% ? I assume that is for individual bonds, not a bond fund

edit: Come back in a year and let us know how much your short term bond earned. thanks

They are paying roughly 3% "coupons" / dividends on new investments. People who already own them are getting the rate they bought at. <snip>

This is not correct. The bonds could be paying any coupon rate. It's the SEC yield or yield to maturity (YTM) that's about 3%. People who already own them are getting the same YTM as someone who buys them today. It's just that people who bought them when yields were lower have experienced a capital loss; they now are earning higher yields that will eventually compensate for the capital loss.

To illustrate, as of 8/31/2018, VBIRX had a yield to maturity of 2.9%, but an average coupon rate of 2.2%.

As another example, on 9/28 I bought a Treasury maturing 9/30/2019 with a coupon rate of 1.75% and a YTM of 2.623% (TEY=2.946%). On 10/1 I bought a Treasury also maturing 9/30/2019, but with a coupon rate of 1.00%--the YTM was 2.635% (TEY = 2.959%). As of now, Schwab is showing the ask yield for both at about 2.62% (for quantity 10).

Kevin

[Kevin M]

I am confused. When we compare intermediate bond funds, we look at their total return and not just at their yield. Are short term bond funds any different?

One can only know total return for a past holding period. Yield is all we have to estimate expected (future) return. The capital return component depends on how yields change in the future, and therefore is unknown. Total return = income return + capital return.

A related question: In an IRA, what produces a higher total return- Money Market Prime or the Federal Funds money market vehicle? The MM prime has a slightly higher yield but also a higher expense ratio. Taxes are not an issue since this is an IRA.

SEC yield is net of expense ratio, so the fund with the higher SEC yield is earning a higher return in an IRA, or if not paying state income tax.

Kevin