Bond funds - Why no bonds under 1 year.

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Doc
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Bond funds - Why no bonds under 1 year.

Post by Doc » Mon Jun 29, 2020 8:34 am

Other than money market funds most fixed income funds have no bonds with maturities under one year. What's the reasoning?

If it's just the index then why the does index stop at one year?
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.

alex_686
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Re: Bond funds - Why no bonds under 1 year.

Post by alex_686 » Mon Jun 29, 2020 8:42 am

Because bonds with a duration of less than 1 year are no longer bonds but cash.

One could debate exactly why this arbitrary line has been drawn at 1 year. Probably because 1 year is a nice round number. But generally you buy bonds for returns, to get returns you need to take some risk, and in this case it is defined as duration risk.

Bonds with less than 1 year generally don't have any duration risk.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

jason2459
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Re: Bond funds - Why no bonds under 1 year.

Post by jason2459 » Mon Jun 29, 2020 8:48 am

Are you looking for a mutual fund or ETF with an effective duration under a year?

If so, there's plenty of them. Look for ultra short bond funds. I hold jmst in a taxable account. But there's several others like CLTL ICSH, SGOV, BIL, GBIL, etc that come to mind. There's more.

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Re: Bond funds - Why no bonds under 1 year.

Post by Valuethinker » Mon Jun 29, 2020 8:53 am

Doc wrote:
Mon Jun 29, 2020 8:34 am
Other than money market funds most fixed income funds have no bonds with maturities under one year. What's the reasoning?

If it's just the index then why the does index stop at one year?
When an instrument has less than 1 year to maturity (technically, in US dollars, usually 360 days because they use a 360 day year) it is Money Market Instrument. (not sure if it is exactly 1 year to maturity?).

So a bond index fund would not hold it-- neither would an active bond fund judged against an index benchmark.

Bond funds make a lot of their money by "rolling down the yield curve" i.e making roll return. Speaking fuzzily, that's the return gained from the fall in yield as the bond term shortens towards maturity. So they tend to sell.

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Re: Bond funds - Why no bonds under 1 year.

Post by Doc » Mon Jun 29, 2020 8:57 am

jason2459 wrote:
Mon Jun 29, 2020 8:48 am
Are you looking for a mutual fund or ETF with an effective duration under a year?
No I have the less that one year handled with some ETFs but mostly with a T-Bill ladder.

I was just curious about "bond" funds/ETFs.
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Re: Bond funds - Why no bonds under 1 year.

Post by Stinky » Mon Jun 29, 2020 8:59 am

jason2459 wrote:
Mon Jun 29, 2020 8:48 am
Are you looking for a mutual fund or ETF with an effective duration under a year?

If so, there's plenty of them. Look for ultra short bond funds. I hold jmst in a taxable account. But there's several others like CLTL ICSH, SGOV, BIL, GBIL, etc that come to mind. There's more.
For example, VUSFX (Vanguard Ultra Short Bond Fund) has a duration of 0.9, and over 61% of its securities have a maturity of less than 1 year.
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Re: Bond funds - Why no bonds under 1 year.

Post by Doc » Mon Jun 29, 2020 9:02 am

Valuethinker wrote:
Mon Jun 29, 2020 8:53 am
Bond funds make a lot of their money by "rolling down the yield curve" i.e making roll return.
I thought about that. But the roll down yield effect is often greatest when the short end is in the three plus year range. I didn't think there was much effect in the 3 to 1 range. But maybe that's the answer?
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.

Blue456
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Re: Bond funds - Why no bonds under 1 year.

Post by Blue456 » Mon Jun 29, 2020 9:34 am

alex_686 wrote:
Mon Jun 29, 2020 8:42 am
Because bonds with a duration of less than 1 year are no longer bonds but cash.

One could debate exactly why this arbitrary line has been drawn at 1 year. Probably because 1 year is a nice round number. But generally you buy bonds for returns, to get returns you need to take some risk, and in this case it is defined as duration risk.

Bonds with less than 1 year generally don't have any duration risk.
You could also take credit risk.

alex_686
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Re: Bond funds - Why no bonds under 1 year.

Post by alex_686 » Mon Jun 29, 2020 9:39 am

Doc wrote:
Mon Jun 29, 2020 9:02 am
Valuethinker wrote:
Mon Jun 29, 2020 8:53 am
Bond funds make a lot of their money by "rolling down the yield curve" i.e making roll return.
I thought about that. But the roll down yield effect is often greatest when the short end is in the three plus year range. I didn't think there was much effect in the 3 to 1 range. But maybe that's the answer?
Depends on the time period and shape of the yield curve, and this varies over time. Like I said, we can debate what the right definition is. This definition was set a long long time ago. Over 50 years, maybe?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

alex_686
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Re: Bond funds - Why no bonds under 1 year.

Post by alex_686 » Mon Jun 29, 2020 9:41 am

Valuethinker wrote:
Mon Jun 29, 2020 8:53 am
When an instrument has less than 1 year to maturity (technically, in US dollars, usually 360 days because they use a 360 day year) it is Money Market Instrument. (not sure if it is exactly 1 year to maturity?).
They have redefined this recently so the maximum average maturity is 60 days. Technically you could hold something up to a year, but this kind of puts a cap for stuff under 90 days.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

alex_686
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Re: Bond funds - Why no bonds under 1 year.

Post by alex_686 » Mon Jun 29, 2020 9:43 am

Blue456 wrote:
Mon Jun 29, 2020 9:34 am
alex_686 wrote:
Mon Jun 29, 2020 8:42 am
Because bonds with a duration of less than 1 year are no longer bonds but cash.

One could debate exactly why this arbitrary line has been drawn at 1 year. Probably because 1 year is a nice round number. But generally you buy bonds for returns, to get returns you need to take some risk, and in this case it is defined as duration risk.

Bonds with less than 1 year generally don't have any duration risk.
You could also take credit risk.
Not really. Credit spreads steady fall with duration. At under a year liquidity spreads dominate the market.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

Blue456
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Re: Bond funds - Why no bonds under 1 year.

Post by Blue456 » Mon Jun 29, 2020 10:07 am

alex_686 wrote:
Mon Jun 29, 2020 9:43 am
Blue456 wrote:
Mon Jun 29, 2020 9:34 am
alex_686 wrote:
Mon Jun 29, 2020 8:42 am
Because bonds with a duration of less than 1 year are no longer bonds but cash.

One could debate exactly why this arbitrary line has been drawn at 1 year. Probably because 1 year is a nice round number. But generally you buy bonds for returns, to get returns you need to take some risk, and in this case it is defined as duration risk.

Bonds with less than 1 year generally don't have any duration risk.
You could also take credit risk.
Not really. Credit spreads steady fall with duration. At under a year liquidity spreads dominate the market.
So you are saying that junk bond 1 year fund is safer than 5 year treasury fund?
There is also sovereign risk and currency risk you can take with funds under 1 year. Neither of them will behave as cash.

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Re: Bond funds - Why no bonds under 1 year.

Post by sycamore » Mon Jun 29, 2020 1:37 pm

FWIW, Total Bond Market has 1.2% in under 1 year maturity.
https://investor.vanguard.com/etf/profile/portfolio/bnd

AND Tax-Exempt Bond has 3.5% in under 1 year maturity.
https://investor.vanguard.com/etf/profi ... folio/vteb

Not much, but not nothing either.

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