Why is Vanguard Treasury Money Market yield so high?

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Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Fri Jun 07, 2019 12:33 pm

SEC 7-day yield of Vanguard Treasury Money Market fund (VUSXX) is 2.33% as of 6/6/2019. That's only down 3 basis points from the high of 2.36%, last seen on 4/5/2019.

The fund holds Treasury Bills in the 1-month to 3-month maturity range, with average maturity of 43 days and weighted average life of 55 days as of 5/31/2019, and the fund as an expense ratio (ER) of 0.09%.

The average of the 1-month, 2-month and 3-month Treasury Bills for the last 7 calendar days minus the fund ER of 9 basis points is 2.26% as of 6/6/2019. So it seems that the fund SEC yield is about 7 basis points higher than it should be.

The 7-day average of Treasury Bill yields in the 1-month to 3-month range has decreased 8 basis points in the time VUSXX yield has decreased only 3 bps. Puzzling.

The 2-month yield has decreased by 3 basis points in the last 7 calendar days, so I'd expect VUSXX yield to decrease further, but it doesn't seem to have decreased by as much as I'd expect to date, so I'm wondering how much of the T Bill decrease will show up over the next few days.

Prime MM SEC yield has dropped 7 basis points from 2.46% on 4/3/2019 to 2.39% on 6/6/2019, so more in line with the decrease in short-term Treasury yields.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Leif » Fri Jun 07, 2019 12:55 pm

The same as its near twin Vanguard Federal VMFXX, 2.33%. VMFXX is generally a bp or two lower. It's ER is 11 bps. They are defying gravity for now.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by retiringwhen » Fri Jun 07, 2019 1:35 pm

Maybe they stretched the maturity by a bit to get a tiny more yield as the rates began to drop? If so, we’ll be seeing the reduction very soon. As they can’t extend it much more than a few weeks with liquidity requirements.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Fri Jun 07, 2019 1:57 pm

retiringwhen wrote:
Fri Jun 07, 2019 1:35 pm
Maybe they stretched the maturity by a bit to get a tiny more yield as the rates began to drop? If so, we’ll be seeing the reduction very soon. As they can’t extend it much more than a few weeks with liquidity requirements.
I don't think that could explain it. The 6-month yield was only 2.22% as of yesterday. It was equal to the 3-month yield on 5/31, which is the first day of the 7-day period I'm using to calculate averages, and dropped below it on the next trading day, 6/3. The 1-year yield was only 2.02% as of yesterday, and was only 2.21% on 5/31.

We can view the holdings as of 5/31/2019 here: https://advisors.vanguard.com/web/c1/fa ... /portfolio.

I think it might have something to do with a couple of floating rate notes they hold. I do see one with a yield of 2.46%, an effective maturity of 6/2/2019 (remember, as of 5/31/2019), and a final maturity of 4/29/2021, but I would have expected the yield on that to drop at the rate reset, which I assume was 6/2/2019.

Other than the floating rate notes, all of the maturities were 89 days or less as of 5/31, and Vanguard gives us the weighted maturity and life (which I posted in the OP), which were in the 1-2 month ballpark on 5/31, as expected.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by ReformedSpender » Fri Jun 07, 2019 2:10 pm

Now you jinxed it...
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by balbrec2 » Fri Jun 07, 2019 6:28 pm

Kevin M wrote:
Fri Jun 07, 2019 12:33 pm
SEC 7-day yield of Vanguard Treasury Money Market fund (VUSXX) is 2.33% as of 6/6/2019. That's only down 3 basis points from the high of 2.36%, last seen on 4/5/2019.

The fund holds Treasury Bills in the 1-month to 3-month maturity range, with average maturity of 43 days and weighted average life of 55 days as of 5/31/2019, and the fund as an expense ratio (ER) of 0.09%.

The average of the 1-month, 2-month and 3-month Treasury Bills for the last 7 calendar days minus the fund ER of 9 basis points is 2.26% as of 6/6/2019. So it seems that the fund SEC yield is about 7 basis points higher than it should be.

The 7-day average of Treasury Bill yields in the 1-month to 3-month range has decreased 8 basis points in the time VUSXX yield has decreased only 3 bps. Puzzling.

The 2-month yield has decreased by 3 basis points in the last 7 calendar days, so I'd expect VUSXX yield to decrease further, but it doesn't seem to have decreased by as much as I'd expect to date, so I'm wondering how much of the T Bill decrease will show up over the next few days.

Prime MM SEC yield has dropped 7 basis points from 2.46% on 4/3/2019 to 2.39% on 6/6/2019, so more in line with the decrease in short-term Treasury yields.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Electron » Fri Jun 07, 2019 10:09 pm

Here is Note 1 from page 41 of the Semiannual Report dated February 28, 2019.

"Represents annualized yield at date of purchase for discount securities, and coupon for coupon-bearing securities." I wonder if small capital gains could be a factor in any of the discount securities. It does seem that the NAV has been consistently above $1.0000.

Note also that the U.S. Government and Agency Obligations are shown as 102.9% of net assets. The Semiannual Report also shows a relatively high weighting in longer maturities. The Floating Rate Note appears to represent only a small percentage of the portfolio.
Electron

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by grok87 » Sat Jun 08, 2019 9:09 am

balbrec2 wrote:
Fri Jun 07, 2019 6:28 pm
Kevin M wrote:
Fri Jun 07, 2019 12:33 pm
SEC 7-day yield of Vanguard Treasury Money Market fund (VUSXX) is 2.33% as of 6/6/2019. That's only down 3 basis points from the high of 2.36%, last seen on 4/5/2019.

The fund holds Treasury Bills in the 1-month to 3-month maturity range, with average maturity of 43 days and weighted average life of 55 days as of 5/31/2019, and the fund as an expense ratio (ER) of 0.09%.

The average of the 1-month, 2-month and 3-month Treasury Bills for the last 7 calendar days minus the fund ER of 9 basis points is 2.26% as of 6/6/2019. So it seems that the fund SEC yield is about 7 basis points higher than it should be.

The 7-day average of Treasury Bill yields in the 1-month to 3-month range has decreased 8 basis points in the time VUSXX yield has decreased only 3 bps. Puzzling.

The 2-month yield has decreased by 3 basis points in the last 7 calendar days, so I'd expect VUSXX yield to decrease further, but it doesn't seem to have decreased by as much as I'd expect to date, so I'm wondering how much of the T Bill decrease will show up over the next few days.

Prime MM SEC yield has dropped 7 basis points from 2.46% on 4/3/2019 to 2.39% on 6/6/2019, so more in line with the decrease in short-term Treasury yields.

Kevin
Are we complaining that we are getting paid too much?
yes
the thing with the floating rate notes is, they don't really trade. so maybe stale pricing?
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Electron » Sun Jun 09, 2019 4:47 pm

An interesting question is how Money Market funds account for small gains and losses when selling securities before maturity. I tried a number of searches and wasn't able to find much information. It would appear that small losses would simply reduce the income paid out. It's not clear if gains would be classified as ordinary income or a capital gain.

There is a De Minimis rule dealing with bonds purchased at discount but I don't know if the rule applies to Money Market funds.

Here is something that is quite surprising. Three Vanguard Money Market funds actually paid out short term capital gains in 2013! I had an account in Prime Money Market fund at the time and received the small distribution in September.

https://www.investmentnews.com/article/ ... rket-funds
Electron

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by grok87 » Sun Jun 09, 2019 5:10 pm

Electron wrote:
Sun Jun 09, 2019 4:47 pm
An interesting question is how Money Market funds account for small gains and losses when selling securities before maturity. I tried a number of searches and wasn't able to find much information. It would appear that small losses would simply reduce the income paid out. It's not clear if gains would be classified as ordinary income or a capital gain.

There is a De Minimis rule dealing with bonds purchased at discount but I don't know if the rule applies to Money Market funds.

Here is something that is quite surprising. Three Vanguard Money Market funds actually paid out short term capital gains in 2013! I had an account in Prime Money Market fund at the time and received the small distribution in September.

https://www.investmentnews.com/article/ ... rket-funds
it's a very mysterious article. thanks for posting. i'm mystified as to why this would be such a big deal as the people int the article suggest
RIP Mr. Bogle.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by wriley4409 » Sun Jun 09, 2019 5:13 pm

Based on the varying maturities, credit quality, and sectors listed at Morningstar's page for the VMFXX fund, there are longer term bonds and other investments that spice up the portfolio.

http://portfolios.morningstar.com/fund/ ... ture=en_US

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Sun Jun 09, 2019 6:53 pm

Electron wrote:
Fri Jun 07, 2019 10:09 pm
Here is Note 1 from page 41 of the Semiannual Report dated February 28, 2019.

"Represents annualized yield at date of purchase for discount securities, and coupon for coupon-bearing securities."
All T Bills are discount securities, so this simply says that they're showing the yields at date of purchase.
Electron wrote:I wonder if small capital gains could be a factor in any of the discount securities.
All of the return of a T Bill comes from the difference in price when bought and sold, so I'm not getting the point here. The purchase discount amount is accreted over the life of the Bill, and contributes to the income. From the semi-annual report:
Vanguard wrote:6. Other: Interest income is accrued daily. Premiums and discounts on debt securities purchased are
amortized and accreted, respectively, to interest income over the lives of the respective securities.
Electron wrote:Note also that the U.S. Government and Agency Obligations are shown as 102.9% of net assets.
The point being?
Electron wrote:The Semiannual Report also shows a relatively high weighting in longer maturities. The Floating Rate Note appears to represent only a small percentage of the portfolio.
I posted a link to the holdings as of 5/31/2019, so we can see more recent holdings than the semiannual report date of 2/28/2019. I don't see a relatively high weighting to longer maturities. As I already noted, the published average maturity is 43 days, which is pretty much in the middle of the 1-90 day range of holdings. I calculate a weighted effective maturity of 42 days from the downloaded holdings.

The FRN with the 2.46% yield was about 1% of holdings as of 5/31, so yeah, not much. The other two notes were about 2% each of holdings, but the rates were in the ballpark of the Bills, so wouldn't contribute to a higher yield.
Electron wrote:
Sun Jun 09, 2019 4:47 pm
An interesting question is how Money Market funds account for small gains and losses when selling securities before maturity. I tried a number of searches and wasn't able to find much information. It would appear that small losses would simply reduce the income paid out. It's not clear if gains would be classified as ordinary income or a capital gain.
I don't think capital gains or losses on sales affect the "income" paid out. I see no such indication in the semiannual report. All income is from interest. Look at pages 42 and 43.

There was a net realized gain of $99K, but it was not distributed. There is a difference of $1K in the net investment income of 240,359,000 and the distributed net investment income of 240,360,000 that I don't see explained, but that's way less than $99K, and the distributed realized capital gain is shown as a dash, which I take to be $0.

Also note this in note D on page 46:
Vanguard wrote:The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year.
For tax purposes, at August 31, 2018, the fund had available capital losses totaling $923,000 that
may be carried forward indefinitely to offset future net capital gains. The fund will use these capital
losses to offset net taxable capital gains, if any, realized during the year ending August 31, 2019;
should the fund realize net capital losses for the year, the losses will be added to the loss
carryforward balance above.
At appears that they are carrying a loss on the books, and using it to offset any capital gains.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Northern Flicker » Sun Jun 09, 2019 7:27 pm

wriley4409 wrote:
Sun Jun 09, 2019 5:13 pm
Based on the varying maturities, credit quality, and sectors listed at Morningstar's page for the VMFXX fund, there are longer term bonds and other investments that spice up the portfolio.

http://portfolios.morningstar.com/fund/ ... ture=en_US
Vanguard’s site says that VMFXX has an average maturity of 43 days:

https://investor.vanguard.com/mutual-fu ... olio/vmfxx

When a treasury bond or note has less than 6 months left until maturity it should trade as a de facto T-bill, with price discounted back by the T-bill rate for the remaining term. I suspect Morningstar is just looking at the CUSIPS in the portfolio and classifying such investments as bonds without looking at the remaining term to maturity.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Ferdinand2014 » Sun Jun 09, 2019 7:41 pm

Low expense ratio and nearly inverted yield curve
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Sun Jun 09, 2019 7:45 pm

wriley4409 wrote:
Sun Jun 09, 2019 5:13 pm
Based on the varying maturities, credit quality, and sectors listed at Morningstar's page for the VMFXX fund, there are longer term bonds and other investments that spice up the portfolio.

http://portfolios.morningstar.com/fund/ ... ture=en_US
VMFXX, Vanguard Federal MM fund, is somewhat different than VUSXX, the topic of this thread

While VUSXX is 100% Treasuries, as of 5/31/2019, VMFXX was 35.9% Treasury Bills, 46.6% other US government obligations, and 17.5% repurchase agreements. The majority of the other USGO is Federal Home Loan Banks securities (USG agency debt). VMFXX had 148 holdings as of 5/31, while VUSXX had only 22. So VUSXX yield should be easier to tie directly to Treasury Bill yields.

Some of the government agency debt is indeed longer maturity, but 181 days is the max (and that's actually for a T Bill). Still, the average maturity as of 5/31/ was only 41 days.

Finally, the VMFXX SEC yield is no higher than VUSXX--actually a smidge lower at 2.32% compared to 2.33% for VUSXX. VMFXX SEC yield dropped a basis point on Friday, while VUSXX held steady. So VMFXX isn't doing anything wild to goose yields.

For 2018, 77.79% of VMFXX income was from US government obligations that are exempt from state and local income tax--that's the number of most interest to me in estimating the taxable-equivalent yield of this fund, which is quite good for me at 2.58% compound TEY, but not as high as VUSXX at 2.65%.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Sun Jun 09, 2019 8:01 pm

Ferdinand2014 wrote:
Sun Jun 09, 2019 7:41 pm
Low expense ratio and nearly inverted yield curve
It appears that you didn't actually read the original post. The expense ratio was factored into the analysis, and I am not comparing the yield to longer-maturity securities or funds, so inverted yield curve is irrelevant to the analysis posted.

The puzzle is that the fund yield is higher than it seems it should be based on average yields of T Bills out to 3-month maturity, which is mostly what the fund holds, after subtracting the expense ratio.

The fact is that the yield curve is inverted, not just "nearly inverted", when comparing short-term to intermediate-term Treasuries. We can easily see that in the fund yields:

2.33% - Treasury Money Market - 0-year duration.
2.10% - Short-term Treasury index fund Admiral - 1.90-year duration.
2.09% - Intermediate-Term Treasury Index fund Admiral - 5.10-year duration.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Ferdinand2014 » Sun Jun 09, 2019 8:17 pm

Kevin M wrote:
Sun Jun 09, 2019 8:01 pm
Ferdinand2014 wrote:
Sun Jun 09, 2019 7:41 pm
Low expense ratio and nearly inverted yield curve
It appears that you didn't actually read the original post. The expense ratio was factored into the analysis, and I am not comparing the yield to longer-maturity securities or funds, so inverted yield curve is irrelevant to the analysis posted.

The puzzle is that the fund yield is higher than it seems it should be based on average yields of T Bills out to 3-month maturity, which is mostly what the fund holds, after subtracting the expense ratio.

The fact is that the yield curve is inverted, not just "nearly inverted", when comparing short-term to intermediate-term Treasuries. We can easily see that in the fund yields:

2.33% - Treasury Money Market - 0-year duration.
2.10% - Short-term Treasury index fund Admiral - 1.90-year duration.
2.09% - Intermediate-Term Treasury Index fund Admiral - 5.10-year duration.

Kevin
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by welderwannabe » Sun Jun 09, 2019 8:41 pm

Electron wrote:
Sun Jun 09, 2019 4:47 pm
An interesting question is how Money Market funds account for small gains and losses when selling securities before maturity.
They try not to. Goal is to keep the daily liquidity of the fund such that it can handle any withdrawals without forced selling of securities.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Electron » Fri Jun 14, 2019 1:45 pm

Kevin M wrote:
Sun Jun 09, 2019 6:53 pm
I don't think capital gains or losses on sales affect the "income" paid out. I see no such indication in the semiannual report. All income is from interest. Look at pages 42 and 43.
Thanks for the comments on all points. I agree on net capital gains being distributed only once per year assuming no offsetting capital losses and no loss carry forward from earlier years. It surprised me a bit that Vanguard Treasury Money Market has had realized capital gains and losses in specific years although they were relatively small. That would imply that some securities are sold before maturity.

I had wondered if any capital gains could be reclassified as interest under a de minimis rule or other provision but was unable to find anything. In addition, expenses are normally taken first from income.

I mentioned the 102.9% of net assets in U.S. Government and Agency Obligations because that has the appearance of leverage which could increase income. The report does show an offsetting position of -2.9% under Other Assets and Liabilities where eight different items are listed. If that list only offsets capital it's possible the fund benefits with additional income.

Lastly, the online Vanguard Fund Profile shows something interesting on the Treasury Fund. The Portfolio tab typically shows Daily liquid assets in the range of 90% to 99%. However, they define Daily liquid assets as government securities, cash, and assets that will mature within 1 business day. That would seem to conflict with the average maturity of the fund.

https://investor.vanguard.com/mutual-fu ... olio/vusxx

Treasury bills would have daily liquidity but any small change in short term rates could result in a gain or loss.
Electron

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Fri Jun 14, 2019 7:11 pm

Here's a thought. It may be a mistake to look only at the Treasury yields for the last 7 days.

If the fund holds a 3-month Treasury to maturity, just before it matures it will be earning the daily accreted income based on the yield three months ago. So maybe I should average the last three months of 3-month yields, the last two months of 2-month yields, and the last one month of 1-month yields.

Doing that I get 2.39%. Subtracting the ER of 0.09% gives 2.30%. This is much closer to today's SEC yield of 2.32% than if I do the same calculation with only the yields for the last seven days, which is only 2.26% before even subtracting the ER.

The SEC yield hit 2.31% yesterday, but ticked up to 2.32% today.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by grok87 » Fri Jun 14, 2019 8:10 pm

Kevin M wrote:
Fri Jun 14, 2019 7:11 pm
Here's a thought. It may be a mistake to look only at the Treasury yields for the last 7 days.

If the fund holds a 3-month Treasury to maturity, just before it matures it will be earning the daily accreted income based on the yield three months ago. So maybe I should average the last three months of 3-month yields, the last two months of 2-month yields, and the last one month of 1-month yields.

Doing that I get 2.39%. Subtracting the ER of 0.09% gives 2.30%. This is much closer to today's SEC yield of 2.32% than if I do the same calculation with only the yields for the last seven days, which is only 2.26% before even subtracting the ER.

The SEC yield hit 2.31% yesterday, but ticked up to 2.32% today.

Kevin
yep. its hold to maturity accounting. not mark to market accounting
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by jeffyscott » Fri Jun 14, 2019 8:53 pm

grok87 wrote:
Fri Jun 14, 2019 8:10 pm
Kevin M wrote:
Fri Jun 14, 2019 7:11 pm
Here's a thought. It may be a mistake to look only at the Treasury yields for the last 7 days.

If the fund holds a 3-month Treasury to maturity, just before it matures it will be earning the daily accreted income based on the yield three months ago. So maybe I should average the last three months of 3-month yields, the last two months of 2-month yields, and the last one month of 1-month yields.

Doing that I get 2.39%. Subtracting the ER of 0.09% gives 2.30%. This is much closer to today's SEC yield of 2.32% than if I do the same calculation with only the yields for the last seven days, which is only 2.26% before even subtracting the ER.

The SEC yield hit 2.31% yesterday, but ticked up to 2.32% today.

Kevin
yep. its hold to maturity accounting. not mark to market accounting
Perhaps that is why a rolling return chart looks like it would match benchmark slightly better were the fund returns shifted slightly to the left, maybe by about 3 months?

Image
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by garlandwhizzer » Sat Jun 15, 2019 1:02 pm

FED policy sets very short term rates which define MM rates. Bond rates are set by market supply and demand. Currently the bond market anticipates that the FED will have to cut rates one to two times in the near future due to the economy slowing and the absence of significant inflation. Therefore they are buying longer duration to lock in on higher rates, front running an anticipated reversal in FED policy from tightening to easing. The market IMO has over-reacted and is likely to be disappointed. This will also be a problem for the equity markets which has already priced in another FED round of lower rate policy that tends to push investment money from essentially no real yield bonds into stocks. This is one reason why stocks are near all term highs while bonds yield hardly more than expected inflation.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by grok87 » Sun Jun 16, 2019 6:36 am

jeffyscott wrote:
Fri Jun 14, 2019 8:53 pm
grok87 wrote:
Fri Jun 14, 2019 8:10 pm
Kevin M wrote:
Fri Jun 14, 2019 7:11 pm
Here's a thought. It may be a mistake to look only at the Treasury yields for the last 7 days.

If the fund holds a 3-month Treasury to maturity, just before it matures it will be earning the daily accreted income based on the yield three months ago. So maybe I should average the last three months of 3-month yields, the last two months of 2-month yields, and the last one month of 1-month yields.

Doing that I get 2.39%. Subtracting the ER of 0.09% gives 2.30%. This is much closer to today's SEC yield of 2.32% than if I do the same calculation with only the yields for the last seven days, which is only 2.26% before even subtracting the ER.

The SEC yield hit 2.31% yesterday, but ticked up to 2.32% today.

Kevin
yep. its hold to maturity accounting. not mark to market accounting
Perhaps that is why a rolling return chart looks like it would match benchmark slightly better were the fund returns shifted slightly to the left, maybe by about 3 months?

Image
http://quotes.morningstar.com/chart/fun ... ture=en_US
nice chart. yes makes sense
RIP Mr. Bogle.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by TBillT » Sun Jun 16, 2019 7:24 am

Vanguard Treasury as my fav MMF at the moment, also state tax exempt for most of us.
We had some since 2008 recession.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Sun Jun 16, 2019 12:22 pm

So, unless we see an increase in 1m-3m Tbill yields soon, and at a rate about as fast as their recent declines, we should see a more rapid decline in VUSXX yield in the coming weeks.

Image

Observations ...

1m and 3m Tbill yields peaked on 3/21, and VUSXX yield peaked on 3/20 at 2.36%, with that yield lasting through 4/5.

The Tbill yields returned to their local pre-peak lows of late January around May 21, on which date VUSXX yield was only down 1 basis point, to 2.35%, from its recent high. I guess we can attribute VUSXX maintaining its yield to the relative symmetry of Treasury yield increases and declines around the peak.

VUSXX yield hit a bottom of 2.31% on 6/13, but popped back up to 2.32% on 6/14.

The Tbill yields accelerated their decline in May, and even more so in June. We should expect to see this as a more rapid decline in VUSXX yields in coming weeks, unless, as mentioned earlier, we see a rebound in the Tbill yields soon.

The yield curve seems to be signaling a continued decline in shorter-term yields, with inversion at all maturities from 1m to 3y, and with the 1m yield, at 2.23%, higher than the 10y yield at 2.09%.

VUSXX yield at 2.32% is higher than all Treasury yields out to 10y and beyond, with the 20y not much higher at 2.38%.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Electron » Sun Jun 16, 2019 1:35 pm

Durability of income from bond funds used to be mentioned in Vanguard Investor Newsletters. Longer average maturities would result in a more durable income stream. It's not surprising that this applies to Money Market funds as well.

The Treasury Money Market fund might be expected to have unrealized capital gains at present although the fund would be better off holding those securities to maturity. Unrealized capital gains may be evident in the NAV which is currently at $1.0003. The NAV has ranged from $1.0001 to $1.0004 over the last six months.

The variation in NAV brings up an interesting question for any money market fund that drops below $1.0000. I wonder how NAV might be restored should any losses be realized.

It would also be interesting to see historical NAV information from 2008 when the Reserve Fund dropped below $1.0000. Other money market funds holding commercial paper may also have been under some stress.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Eric76 » Sun Jun 16, 2019 1:43 pm

VUSXX has a higher yield than VBIRX. Due to inverted yield curve I guess.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Sun Jun 16, 2019 3:24 pm

Eric76 wrote:
Sun Jun 16, 2019 1:43 pm
VUSXX has a higher yield than VBIRX. Due to inverted yield curve I guess.
Yeah, but even better to compare to other Treasury funds. VBIRX is short-term bond index (SEC yield = 2.23%), which is about 65% US government obligations. Here is the comparison to the Treasury index fund yields (bond funds all admiral shares):

2.32% - VUSXX - MM, duration 0 years
2.02% - VSBSX - short-term Treasury index, duration 1.9 years
2.01% - VSIGX - intermediate-term Treasury index, duration 5.2 years
2.54% - VLGSX - long-term Treasury index, duration 17.5 years

So like the Treasury yield curve, we see inversion through intermediate term maturities, but slightly higher yields for longer term maturities (VLGSX has average maturity of 25.4 years).

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Fri Jun 21, 2019 11:53 am

Kevin M wrote:
Fri Jun 14, 2019 7:11 pm
Here's a thought. It may be a mistake to look only at the Treasury yields for the last 7 days.

If the fund holds a 3-month Treasury to maturity, just before it matures it will be earning the daily accreted income based on the yield three months ago. So maybe I should average the last three months of 3-month yields, the last two months of 2-month yields, and the last one month of 1-month yields.

Doing that I get 2.39%. Subtracting the ER of 0.09% gives 2.30%. This is much closer to today's SEC yield of 2.32% than if I do the same calculation with only the yields for the last seven days, which is only 2.26% before even subtracting the ER.

The SEC yield hit 2.31% yesterday, but ticked up to 2.32% today.
The subsequent data is not supporting this theory. The 1m, 2m, and 3m Treasury yields have all declined since I posted the above, and the indicated lagging average has declined as well, yet VUSXX SEC yield has increased to 2.34% as of yesterday.

Again, the lagging average is the average of yield for the last one month of 1m Tbills, two months of 2m Tbills, and three months of 3m Tbills, with the assumption that the Bills are held to maturity. However, we know this assumption probably is not correct in general, because the fund does discuss unrealized capital gains and losses in the most recent semiannual report:
Semannual report wrote:The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year.
For tax purposes, at August 31, 2018, the fund had available capital losses totaling $923,000 that
may be carried forward indefinitely to offset future net capital gains. The fund will use these capital
losses to offset net taxable capital gains, if any, realized during the year ending August 31, 2019;
should the fund realize net capital losses for the year, the losses will be added to the loss
carryforward balance above.
(underline mine)

With that caveat in mind, on 6/13, the lagging Tbills average less the ER was 2.30%, so only 1 basis point lower than the SEC yield of 2.31% on that date. However, now the lagging average less ER has declined to 2.27%, while the SEC yield has increased to 2.34%.

I don't know how the fund managers are accomplishing this, but I think I like it. A concern is that there will be some kind of boomerang effect, where the SEC yield declines even more rapidly than the decline in Tbills, once the magic spell wears off.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Electron » Sat Jun 22, 2019 4:40 pm

Kevin M wrote:
Fri Jun 21, 2019 11:53 am
However, now the lagging average less ER has declined to 2.27%, while the SEC yield has increased to 2.34%.
This has become quite a mystery and it will be interesting to see if the trend continues in future periods. One possibility could be complicated accounting rules that allow some capital gains to be paid out as income or used to offset expenses.

Here are two notes from the latest report along those lines. "Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes."

"The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year." It's not clear if there is another category of capital gains and losses.

Realized and unrealized gains and losses are apparently very low relative to total fund assets. The distribution tab in the fund profile shows $0.00 and 0.00% for both cases. NAV is currently $1.0004 which may indicate some unrealized gains.

https://investor.vanguard.com/mutual-fu ... ions/vusxx

There is also that 102.9% of fund assets invested in U.S. Government and Agency Obligations as shown in the latest report. If a small amount of leverage did exist in the fund, the SEC yield could increase by the same percentage.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by linenfort » Sat Jun 22, 2019 6:34 pm

Kevin M wrote:
Sun Jun 16, 2019 12:22 pm
The Tbill yields accelerated their decline in May, and even more so in June. We should expect to see this as a more rapid decline in VUSXX yields in coming weeks, unless, as mentioned earlier, we see a rebound in the Tbill yields soon.

This is where most of my cash is, VUSXX. I’m reluctant to make a change. Assuming you have VUSXX, will you be moving on to something else? I know you’ve made a sort of hobby out of squeezing extra yield by going from CD to tbill to CD.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Sat Jun 22, 2019 8:56 pm

linenfort wrote:
Sat Jun 22, 2019 6:34 pm
Kevin M wrote:
Sun Jun 16, 2019 12:22 pm
The Tbill yields accelerated their decline in May, and even more so in June. We should expect to see this as a more rapid decline in VUSXX yields in coming weeks, unless, as mentioned earlier, we see a rebound in the Tbill yields soon.

This is where most of my cash is, VUSXX. I’m reluctant to make a change. Assuming you have VUSXX, will you be moving on to something else? I know you’ve made a sort of hobby out of squeezing extra yield by going from CD to tbill to CD.
A few weeks ago I was going with 6-month Treasuries in taxable, but now all Treasury yields out to 10-year maturity and beyond are lower than VUSXX yield, so I'm just sticking with VUSXX with new cash.

Brokered CD yields have dropped a lot lately too. I had a Tbill maturing in a Vanuard IRA that I would have put into a 6-month CD at 2.40%, but the CD issue date was one day later than the Tbill maturity date, and now the 6-month brokered CD yield is only 2.00%, with the 3-month at 2.30%. So in the IRA I'm just sticking with Prime MM at 2.36% for now.

I had an IRA CD mature at Synchrony a week ago, and I just rolled it into a 1-year Synchrony CD at 2.60%, which looks even better now than it did a week ago.

I'm not wild about opening new credit union or bank accounts, especially for IRAs. I have quite a few already, so if a CD matures and the CU or bank is offering a decent yield on a short-term CD, that's what I'll use.

In taxable I also have an add-on CD at 3.50%, which I only have a few thousand in so far. I've been adding $1,000 per month, but will likely accelerate that with proceeds from maturing bonds and CDs in taxable. Unfortunately, that one is limited to $100K of deposits.

One must acknowledge the reinvestment risk of staying short term. Holding my intermediate-term bond funds, and having some good longer term CDs at nice yields hedges the reinvestment risk to some extent.

Brokered CDs were competitive with direct CDs for awhile, so I was moving toward consolidating at Vanguard and Fidelity as IRA CDs matured at banks and credit unions. That's not the case anymore; the best direct CD deals lately have been offering juicy premiums over brokered CDs, and of course over Treasuries too.

Similarly, short-term Treasuries were competitive with CDs in taxable until recently, and flattish yield curves haven't been offering much reward for extending maturity for awhile now. With the recent drops in short-term Treasury yields, there just aren't many obvious places to turn, and paying more attention to good direct CD deals may once again be the way to go--if one has the inclination to do that.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by linenfort » Mon Jun 24, 2019 7:48 am

Thank you!

My VPALX (long term state munis) is yielding the same as treasury money market. It’s just crazy.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by MikeG62 » Mon Jun 24, 2019 8:45 am

Kevin M wrote:
Sat Jun 22, 2019 8:56 pm
linenfort wrote:
Sat Jun 22, 2019 6:34 pm
Kevin M wrote:
Sun Jun 16, 2019 12:22 pm
The Tbill yields accelerated their decline in May, and even more so in June. We should expect to see this as a more rapid decline in VUSXX yields in coming weeks, unless, as mentioned earlier, we see a rebound in the Tbill yields soon.

This is where most of my cash is, VUSXX. I’m reluctant to make a change. Assuming you have VUSXX, will you be moving on to something else? I know you’ve made a sort of hobby out of squeezing extra yield by going from CD to tbill to CD.
A few weeks ago I was going with 6-month Treasuries in taxable, but now all Treasury yields out to 10-year maturity and beyond are lower than VUSXX yield, so I'm just sticking with VUSXX with new cash.

Brokered CD yields have dropped a lot lately too. I had a Tbill maturing in a Vanuard IRA that I would have put into a 6-month CD at 2.40%, but the CD issue date was one day later than the Tbill maturity date, and now the 6-month brokered CD yield is only 2.00%, with the 3-month at 2.30%. So in the IRA I'm just sticking with Prime MM at 2.36% for now.

I had an IRA CD mature at Synchrony a week ago, and I just rolled it into a 1-year Synchrony CD at 2.60%, which looks even better now than it did a week ago.

I'm not wild about opening new credit union or bank accounts, especially for IRAs. I have quite a few already, so if a CD matures and the CU or bank is offering a decent yield on a short-term CD, that's what I'll use.

In taxable I also have an add-on CD at 3.50%, which I only have a few thousand in so far. I've been adding $1,000 per month, but will likely accelerate that with proceeds from maturing bonds and CDs in taxable. Unfortunately, that one is limited to $100K of deposits.

One must acknowledge the reinvestment risk of staying short term. Holding my intermediate-term bond funds, and having some good longer term CDs at nice yields hedges the reinvestment risk to some extent.

Brokered CDs were competitive with direct CDs for awhile, so I was moving toward consolidating at Vanguard and Fidelity as IRA CDs matured at banks and credit unions. That's not the case anymore; the best direct CD deals lately have been offering juicy premiums over brokered CDs, and of course over Treasuries too.

Similarly, short-term Treasuries were competitive with CDs in taxable until recently, and flattish yield curves haven't been offering much reward for extending maturity for awhile now. With the recent drops in short-term Treasury yields, there just aren't many obvious places to turn, and paying more attention to good direct CD deals may once again be the way to go--if one has the inclination to do that.

Kevin
Agree with all of your observations Kevin. I see no obvious places to turn either- very different from 6,9,12 months ago. I have a large $ amount of 6-month Treasuries maturing over the next few months and am struggling with reinvestment options. Glad I did not select auto-roll as 6-month Treasuries are not likely where that money is going. Right now, I can do pretty close to as well in Fidelity's premium MMF (FZDXX) taking zero term risk. Only reason for me to reinvest in 6-month Treasuries is to push the interest into 2020 at this point (well for those purchases starting next week anyway). I did invest a slug of money from maturing 6-month Treasuries at the end of May in Ally's 15-month select CD (yield at 2.80%). I may do that with more maturing Treasuries if Ally offers it again.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Mon Jun 24, 2019 10:30 am

MikeG62 wrote:
Mon Jun 24, 2019 8:45 am
I have a large $ amount of 6-month Treasuries maturing over the next few months and am struggling with reinvestment options. Glad I did not select auto-roll as 6-month Treasuries are not likely where that money is going.
I have a small quantity of Treasuries on auto-roll, but it's easy enough to cancel it by canceling the order for the replacement Treasury once it's placed, so that's what I'm doing.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by MikeG62 » Mon Jun 24, 2019 10:43 am

Kevin M wrote:
Mon Jun 24, 2019 10:30 am
MikeG62 wrote:
Mon Jun 24, 2019 8:45 am
I have a large $ amount of 6-month Treasuries maturing over the next few months and am struggling with reinvestment options. Glad I did not select auto-roll as 6-month Treasuries are not likely where that money is going.
I have a small quantity of Treasuries on auto-roll, but it's easy enough to cancel it by canceling the order for the replacement Treasury once it's placed, so that's what I'm doing.

Kevin
Yup that is true.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by welderwannabe » Mon Jun 24, 2019 10:57 am

There are things like ICSH that can help stretch a little yield, but the additional risk is non zero.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by jeffyscott » Mon Jun 24, 2019 11:26 am

welderwannabe wrote:
Mon Jun 24, 2019 10:57 am
There are things like ICSH that can help stretch a little yield, but the additional risk is non zero.
I use something similar in mutual fund form in an IRA, but ICSH reports YTM of 2.55%, which would put the net YTM at 2.47% after subtracting the ER. Note that the reported 30 day SEC yield is much higher for some reason, 2.72%. The similar Vanguard ultrashort is reporting SEC yield of 2.49% and that (and the YTM figure) makes me think the high figure for ICSH is, perhaps, some sort of artifact of the SEC calculations :?: .
https://www.ishares.com/us/products/258 ... income-etf#/

There are a few banks offering savings accounts at about 2.5%. At my state income tax rate, 2.5% vs. 2.34% from treasury money market would be about a toss-up in taxable. So ultrashort funds now seem to be offering little or no potential excess return for the risk taken.

I actually moved a small amount from ultrashort to very short TIPS today in an IRA. I bought a few of the ones maturing in 2020. I am hoping to defy what the market appears to expect :twisted: and get maybe 2.5% or more from the TIPS.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by welderwannabe » Mon Jun 24, 2019 11:33 am

jeffyscott wrote:
Mon Jun 24, 2019 11:26 am
I use something similar in mutual fund form in an IRA, but ICSH reports YTM of 2.55%, which would put the net YTM at 2.47% after subtracting the ER. Note that the reported 30 day SEC yield is much higher for some reason, 2.72%. The similar Vanguard ultrashort is reporting SEC yield of 2.49% and that (and the YTM figure) makes me think the high figure for ICSH is, perhaps, some sort of artifact of the SEC calculations :?: .
https://www.ishares.com/us/products/258 ... income-etf#/

There are a few banks offering savings accounts at about 2.5%. At my state income tax rate, 2.5% vs. 2.34% from treasury money market would be about a toss-up in taxable. So ultrashort funds now seem to be offering little or no potential excess return for the risk taken.

I actually moved a small amount from ultrashort to very short TIPS today in an IRA. I bought a few of the ones maturing in 2020. I am hoping to defy what the market appears to expect :twisted: and get maybe 2.5% or more from the TIPS.
Well an SEC yield is a trailing look and a YTM is a forward look, and with interest rates doing what they have been doing I think this makes sense. They have dropped a bit in the last 30 days.

I would expect vanguard's ultra short to trail ICSH due to credit quality alone. ICSH's assets are of slightly lower credit quality (some would arge significant with Vanguards at almost 50% AAA and ICSH almost 0% AAA). However Vanguard's is slightly longer duration, which means they may not have been as impacted by the lowering rates as fewer of their assets have rolled over during the decline than in ICSH...yet.

All in all I think it is probably safe to compare the SEC yield of the two funds and use that as a basis of comparison. I think it lines up.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by jeffyscott » Mon Jun 24, 2019 11:58 am

welderwannabe wrote:
Mon Jun 24, 2019 11:33 am
However Vanguard's is slightly longer duration, which means they may not have been as impacted by the lowering rates as fewer of their assets have rolled over during the decline than in ICSH...yet.
That would affect the distribution yield but is not how YTM or SEC yield work, they are based on current market values. If anything I would think that the Vg fund would be more affected, due to longer duration and higher quality.

FWIW, unlike that ETF, the vanguard fund shows YTM that is consistent with it's SEC yield.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Frank2012 » Mon Jun 24, 2019 12:23 pm

Dumb question, but I'll ask it anyway: My settlement fund is Vanguard Federal MM...can I change my settlement fund so its Vanguard Treasury MM? Or do I just use the settlement fund to buy Treasury MM like I would for any other fund?

I am aware of the $50k minimum for Vanguard Treasury MM.

Thanks!

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by welderwannabe » Mon Jun 24, 2019 12:24 pm

Deleted post as I was confusing myself.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by welderwannabe » Mon Jun 24, 2019 12:31 pm

Frank2012 wrote:
Mon Jun 24, 2019 12:23 pm
Dumb question, but I'll ask it anyway: My settlement fund is Vanguard Federal MM...can I change my settlement fund so its Vanguard Treasury MM? Or do I just use the settlement fund to buy Treasury MM like I would for any other fund?

I am aware of the $50k minimum for Vanguard Treasury MM.

Thanks!
You cannot.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Mon Jun 24, 2019 9:13 pm

This is interesting:

Image

Prime MM yield has been declining as Treasury MM yield has been defying market gravity. Prime MM SEC yield at 2.36% now is only 3 basis points higher than Treasury MM yield at 2.33%! And this is before considering any state tax exemption.

The 1m, 2m and 3m Treasury yields now are 2.12, 2.13 and 2.13 percent.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by welderwannabe » Tue Jun 25, 2019 11:03 am

Kevin M wrote:
Mon Jun 24, 2019 9:13 pm
This is interesting:

Image

Prime MM yield has been declining as Treasury MM yield has been defying market gravity. Prime MM SEC yield at 2.36% now is only 3 basis points higher than Treasury MM yield at 2.33%! And this is before considering any state tax exemption.

The 1m, 2m and 3m Treasury yields now are 2.12, 2.13 and 2.13 percent.

Kevin
Yah, I dont know whats going on. Maybe they are buying some Venezuelan Treasuries or something? :)

Since a MM uses amoritization accounting, maybe they had some 6 month or even some 1 year bills that they are still accuring the imputed interest daily...ones they bought before the rate crash. I dont know what else it could be. At the end of the day they buy bills. The yield of this MM should be roughly equal to the current yield on bills minus the expense ratio.

While a MM has daily liquidity requirements, I believe they can stretch the duration a little more on a Treasury MM due to the inherent liquidity of bills if they have to sell early due to redemptions.

Im out of other ideas here.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by mervinj7 » Tue Jun 25, 2019 11:46 am

welderwannabe wrote:
Tue Jun 25, 2019 11:03 am
Kevin M wrote:
Mon Jun 24, 2019 9:13 pm
This is interesting:

Image

Prime MM yield has been declining as Treasury MM yield has been defying market gravity. Prime MM SEC yield at 2.36% now is only 3 basis points higher than Treasury MM yield at 2.33%! And this is before considering any state tax exemption.

The 1m, 2m and 3m Treasury yields now are 2.12, 2.13 and 2.13 percent.

Kevin
Yah, I dont know whats going on. Maybe they are buying some Venezuelan Treasuries or something? :)

Since a MM uses amoritization accounting, maybe they had some 6 month or even some 1 year bills that they are still accuring the imputed interest daily...ones they bought before the rate crash. I dont know what else it could be. At the end of the day they buy bills. The yield of this MM should be roughly equal to the current yield on bills minus the expense ratio.

While a MM has daily liquidity requirements, I believe they can stretch the duration a little more on a Treasury MM due to the inherent liquidity of bills if they have to sell early due to redemptions.

Im out of other ideas here.
I'm utterly confused as well. This past year, I've convinced quite a few co-workers to set up auto-rolling Treasury ladders for their Emergency Funds. The idea was that they a bit of a yield premium by slightly increasing their duration and eliminating the ER but that's clearly not correct right now.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by jeffyscott » Tue Jun 25, 2019 11:59 am

welderwannabe wrote:
Tue Jun 25, 2019 11:03 am
Since a MM uses amoritization accounting, maybe they had some 6 month or even some 1 year bills that they are still accuring the imputed interest daily...ones they bought before the rate crash. I dont know what else it could be. At the end of the day they buy bills. The yield of this MM should be roughly equal to the current yield on bills minus the expense ratio.
Does amortization accounting mean that if they bought 6 month treasuries in Feb at ~2.5%, they are still counting those as a yield of 2.5%. If so then that would seem to be the explanation and would also, I think, explain the lag between the fund and it's benchmark's return as seen in the rolling return chart that I posted above.

Over the longer term the fund does trail it's benchmark by something close to the ER. As of 5/31 the difference is 7-11 bp for 5, 10, and 15 years.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Tue Jun 25, 2019 12:37 pm

welderwannabe wrote:
Tue Jun 25, 2019 11:03 am
Since a MM uses amoritization accounting, maybe they had some 6 month or even some 1 year bills that they are still accuring the imputed interest daily...ones they bought before the rate crash.
<snip>
I think we have access to enough information to discount this possibility.

We can see the holdings as of 5/31/2019. The longest effective maturity then was 8/29/2019, so within their stated 3-month max maturity.

On 5/31/2019, the 6-month yield was 2.35%, which was the same as 1m and 3m, with the 2m at 2.38%. The 1-year yield was only 2.21%. Yields fell from there.

Conclusion. Since 5/31/2019, at which time the maximum maturity was 3 months, there have been no higher yield Tbills available to buy to increase the fund yield.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Tue Jun 25, 2019 12:52 pm

jeffyscott wrote:
Tue Jun 25, 2019 11:59 am
Over the longer term the fund does trail it's benchmark by something close to the ER.
Right. That's what I had been seeing until recently, especially since I updated my yield estimation method to average yields for 1m, 2m, and 3m Treasuries over the last 1, 2 and 3 months respectively. But even that broke down starting around the middle of this month. Here's a chart showing the indicated average of Treasury yields minus the ER of 9 basis points, compared to VUSXX SEC yield since 4/1/2019 (so including the 3-month yield average back to 1/2/2019).

Image

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