
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.David Jay wrote: ↑Tue Oct 09, 2018 2:37 pm 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).
It’s now my job to explain other people’s decisions?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
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).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.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
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.PugetSoundguy wrote: ↑Tue Oct 09, 2018 5:22 pmYes, 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.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
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.David Jay wrote: ↑Tue Oct 09, 2018 2:37 pm 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).
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.PugetSoundguy wrote: ↑Tue Oct 09, 2018 5:22 pmYes, 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.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
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?
Hi there-catalina355 wrote: ↑Wed Oct 10, 2018 10:04 pmI 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.David Jay wrote: ↑Tue Oct 09, 2018 2:37 pm 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,David Jay wrote: ↑Tue Oct 09, 2018 2:37 pm 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).
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.
+1DartThrower wrote: ↑Thu Oct 11, 2018 3:51 pm In addition I know that I will be holding onto the fund long enough for the higher yield to benefit me.
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?villars wrote: ↑Thu Oct 11, 2018 10:20 amCorrect 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.
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.
VBIRX holds Treasury notes, which are extremely liquid. The fund manager should have no problem dealing with cash inflows or outflows.S_Track wrote: ↑Thu Oct 11, 2018 5:10 pm. 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 wrote: ↑Thu Oct 11, 2018 6:01 pmYield 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
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.mc2 wrote: ↑Thu Oct 11, 2018 7:57 amHi there-catalina355 wrote: ↑Wed Oct 10, 2018 10:04 pmI 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.David Jay wrote: ↑Tue Oct 09, 2018 2:37 pm 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).
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
Typo. Fixed.
Correct.Chesterfield wrote: ↑Thu Oct 11, 2018 10:40 pm Pls remind me again, are Treasury bond funds are only state tax exempt correct, not federal tax exempt?
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.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.
As always, Kevin, you're so helpful w/ bonds stuff. Thanks.Kevin M wrote: ↑Fri Oct 12, 2018 2:25 pmCorrect.Chesterfield wrote: ↑Thu Oct 11, 2018 10:40 pm Pls remind me again, are Treasury bond funds are only state tax exempt correct, not federal tax exempt?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.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.
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
FWIW:Kevin M wrote: ↑Fri Oct 12, 2018 2:00 pmTypo. Fixed.
I prefer the index fund since duration is shorter, and it holds only bonds in the 1-3 year maturity range.
Kevin
A duration difference of 1.93 to 2.14 is hardly enough to be a factor.Morningstar wrote: 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.
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.Doc wrote: ↑Fri Oct 12, 2018 2:43 pmFWIW:Kevin M wrote: ↑Fri Oct 12, 2018 2:00 pmTypo. Fixed.
I prefer the index fund since duration is shorter, and it holds only bonds in the 1-3 year maturity range.
Kevin
A duration difference of 1.93 to 2.14 is hardly enough to be a factor.Morningstar wrote: 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.
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.![]()
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.
OK so you don't really like either of them.
Past returns would be low as interest rates have been rising (thus bond prices falling).
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.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
Soon2BXProgrammer,Soon2BXProgrammer wrote: ↑Fri Oct 12, 2018 4:49 pmI 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.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
It is all in my head, the benefits that is.
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.JoMoney wrote: ↑Fri Oct 12, 2018 5:05 pmThey 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).
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.
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.dknightd wrote: ↑Fri Oct 12, 2018 5:14 pmWhich makes me wonder. If you wanted to pay next years bills would you put you money in Money Market, or short term bond fund.JoMoney wrote: ↑Fri Oct 12, 2018 5:05 pmThey 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).
I tried this experiment, YTD MM is ahead of short term bond fund. Next year might be different.
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.KlangFool wrote: ↑Fri Oct 12, 2018 5:03 pmSoon2BXProgrammer,Soon2BXProgrammer wrote: ↑Fri Oct 12, 2018 4:49 pmI 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.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
It is all in my head, the benefits that is.
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
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.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--they know nothing about my personal risk aversion and preferences for risk/return trade-offs.
The index fund changed from one 1-3 year benchmark to another 1-3 year benchmark.The difference in actual portfolio holdings was changed less than 12 months ago. What will the difference be next January?
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.
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.
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.
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.