Short term treasury

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dru808
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Short term treasury

Post by dru808 » Sun Jul 14, 2019 5:36 pm

Are there any reasons not to hold cash in a short term treasury bond fund shv or vgsh vs a mm or savings account? Can you loose principal invested in short term bonds? Is the full faith and credit of the US government not as reliable as FDIC? If the government were not able to pay its debt (bonds) would it be able to cover the FDIC on savings accounts?

NMBob
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Re: Short term treasury

Post by NMBob » Sun Jul 14, 2019 5:44 pm

it's a catch 22, the fdic has it's own money raised from fees. However, guess where the fdic invests that money.....US treasuries.

Yes, short term bond funds can lose value. You have credit risk (company goes broke and fails to pay off) and interest rate risk (interest rates go up, so your lower rate bond is now worth less.)


https://investor.vanguard.com/mutual-fu ... file/VSBSX

The effective duration for VSBSX , Vanguard Short term government bond is 1.9. Expect a 1.9 percent loss in the bonds value if there is a 1 percent increase in interest rates.
Last edited by NMBob on Sun Jul 14, 2019 5:56 pm, edited 1 time in total.

chessknt
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Re: Short term treasury

Post by chessknt » Sun Jul 14, 2019 5:46 pm

Bond funds can lose value, individual bonds do not but lack liquidity. Savings account is more liquid than bonds but has upside of better interest rate than checking which is why most go this route

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nisiprius
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Re: Short term treasury

Post by nisiprius » Sun Jul 14, 2019 6:11 pm

With an individual bond, even a short-term treasury, if the interest rates that apply to that term rise, the market value of your bond will fall. It has nothing to do with the soundness or credit quality of the Treasury. That only applies if you hold the bond to maturity. The Treasury is virtually certain to make the coupon payment and pay back the principal at maturity.

In between, though, if you don't want to wait until maturity, you can't do an "early withdrawal" the way you can with a CD. You must sell the bond on the market. Your bond will will be competing against freshly issued bonds. If the freshly issued bonds have a higher interest rate, then of course people are not going to be willing to pay face value for your bond, because for the same money they can buy a freshly issued bond that pays more. So, if you need the money before maturity, you will have to sell it on the market and you will lose money, regardless of safe the U.S. Treasury is.

In the case of a short-term bond fund or ETF, the risk is not high, but it's there. The balance in a bank or money market fund never goes down, not the slightest bit. You never have less at the end the month than before. That's not true for a short-term treasury fund.

I can't tell you whether or not the (small) reward is worth the (small) risk, but I can tell you some statistics for VGSH. (Since inception, SHV has actually underperformed VMMXX).

Assuming an investment of $10,000 and a holding period of six months, "returns" in absolute dollars (not annual rates), and comparing SHV with the Vanguard Prime Money Market fund, VMMXX:

From inception of VGSH in 1/2010 through 12/2018,
  • There were 103 overlapping six-month periods.
  • VMMXX never lost money over any of those six-month periods.
  • On the average, VGSH made $36.57 while VMMXX made $18.61, an average benefit of $17.97.
  • But, VGSH underperformed VMMXX 27 times out of 103. You were hoping to make more money than with VMMXX, but 26% of the time you would have made less.
  • You would actually have lost money 17 times out of 103. At the end of six months, you'd have had less money than when you started.
  • When losses did occur, the average loss was -$26.73.
  • The worst loss was -$82.31 and it occurred over 9/2017 through 2/2018.
This shows how VGSH (blue) and VMMXX (orange) did, from 9/2017 through 2/2018.

Source

Image

Oddly enough, since inception in 3/2007, SHV underperformed VMMXX on the average. It underperformed VMMXX in 76 out of 137 overlapping six month periods, more than half the time. It lost money 13 out of 137 times. However, the worst loss was only -$5.11. It occurred over 7/2015 through 12/2015.

As I say, only you can judge if the reward is worth the risk, but yes, there is more risk in short term bond funds than in money market funds and bank accounts.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Doc
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Re: Short term treasury

Post by Doc » Sun Jul 14, 2019 6:16 pm

dru808 wrote:
Sun Jul 14, 2019 5:36 pm
Are there any reasons not to hold cash in a short term treasury bond fund shv or vgsh vs a mm or savings account? Can you loose principal invested in short term bonds? Is the full faith and credit of the US government not as reliable as FDIC? If the government were not able to pay its debt (bonds) would it be able to cover the FDIC on savings accounts?
Short term Treasuries are not "cash". The value of the T's varies if you want to sell before maturity.

Yes if you sell before maturity.

If the "full faith and credit" fails the FDIC goes with it.

No.

If you want to "cash out" out at your convenience without loss of any principal no matter how small, go with the FDIC product. If you want higher return to with short term T's, think T-bills.

Personally I go with the T-bills because the very small principal risk is offset by the state taxes.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

columbia
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Re: Short term treasury

Post by columbia » Sun Jul 14, 2019 6:35 pm

Vanguard offers an ultra short bond fund, with a duration of 0.9 years:

https://investor.vanguard.com/mutual-fu ... view/vubfx

It is *not* just treasuries, however.

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dru808
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Re: Short term treasury

Post by dru808 » Sun Jul 14, 2019 6:40 pm

What’s the point of the short term bond for an investor? Let’s say you’re aggressive 90/10, wouldn’t it be better to hold the 10 in cd/mm? What benefit does the short term treasury offer over mm/cd? Why go aggressive with the majority 90 and go safe with slight risk with the 10 in short bonds? Any aa for that matter, aren’t you trying to balance the risk with safety?

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Doc
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Re: Short term treasury

Post by Doc » Sun Jul 14, 2019 7:13 pm

dru808 wrote:
Sun Jul 14, 2019 6:40 pm
What’s the point of the short term bond for an investor? Let’s say you’re aggressive 90/10, wouldn’t it be better to hold the 10 in cd/mm? What benefit does the short term treasury offer over mm/cd? Why go aggressive with the majority 90 and go safe with slight risk with the 10 in short bonds? Any aa for that matter, aren’t you trying to balance the risk with safety?
The general recommendation for a high AA portfolio would be to hold the FI portion of that asset allocation in long term Treasuries. The reasoning is that LT T's are inversely correleted to equities in times of stress. You seen to be concerned with what you hold if you have some kind of cash emergency in August. That's a whole different question.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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nisiprius
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Re: Short term treasury

Post by nisiprius » Sun Jul 14, 2019 7:31 pm

columbia wrote:
Sun Jul 14, 2019 6:35 pm
Vanguard offers an ultra short bond fund, with a duration of 0.9 years:

https://investor.vanguard.com/mutual-fu ... view/vubfx

It is *not* just treasuries, however.
For the curious, and using the same conventions as in my previous post, there have been 40 overlapping six-month periods since inception of VUBXX. In that time, on the average, a $10,000 investment in the Vanguard Prime Money Market Fund, VMMXX, for six months, has earned $45.30; in VUBXX, $59.58; for an average benefit of $14.28. Neither fund has lost money over any of those forty six-month periods. However, VUBFX has underperformed VMMXX in nine of those forty periods.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Short term treasury

Post by Doc » Mon Jul 15, 2019 7:46 am

nisiprius wrote:
Sun Jul 14, 2019 7:31 pm
For the curious, and using the same conventions as in my previous post, there have been 40 overlapping six-month periods since inception of VUBXX.
For the curious why did you use six-month periods. Morningstar's rolling return chart gives you options of 3, 6, 12, 24, 36 and 60 months.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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