Is it necessary to use both Total Bond Fund and Intermediate-Term Treasury

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Cody
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Is it necessary to use both Total Bond Fund and Intermediate-Term Treasury

Post by Cody » Mon Jun 29, 2020 10:19 am

I am heavily invested (60%) in Vanguard's Total Bond Market fund.

Is is necessary to also hold Vanguard Intermediate-Term Treasury? Or even switch all out from TB. I see that this fund has 99% of its holding in Govt tresuries which makes the fund slightly less susceptible to interest rates. (Total Bond has 60% US Gov't treasuries).

As I check websites like Larry Swedroe's simply portfolio he uses Vanguard Intermediate-Term Treasury rather than Total Bond.

By addind Vanguard Intermediate-Term Treasury I would make my portfolio somewhat more complicated (now 3 funds).

Thoughts

MotoTrojan
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Re: Is it necessary to use both Total Bond Fund and Intermediate-Term Treasury

Post by MotoTrojan » Mon Jun 29, 2020 10:24 am

There are arguments for holding one or the other but I wouldn't hold both myself.

Both have interest rate risk proportional to their duration (longer the duration, larger the risk). The treasury fund will have essentially no credit risk though as the US government is pretty reliable at paying people back; corporate bonds could have defaults and thus wipe out expected future distributions, hence why they pay a higher yield to begin with (to compensate for that risk).

Many (myself included) prefer to take their risk on the equity side, and like to use treasuries on the bond side. Some (myself included) also believe this creates a more efficient portfolio as treasuries tend to do well when there is financial stress on equities, where-as corporate bonds can also do poorly in those situations, so they can help diversify a portfolio further (one zigs while the other zags). Having said that though, treasury rates are pretty pathetic right now, so reaching to corporates for yield isn't a terrible strategy. My emergency fund is in ICSH for example, a very short duration fund with corporate bonds; in that case I actually do have limited interest rate risk compared to Total Bond or Intermediate treasuries, but still have credit risk.

HawkeyePierce
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Re: Is it necessary to use both Total Bond Fund and Intermediate-Term Treasury

Post by HawkeyePierce » Mon Jun 29, 2020 10:30 am

Cody wrote:
Mon Jun 29, 2020 10:19 am
Is is necessary to also hold Vanguard Intermediate-Term Treasury? Or even switch all out from TB. I see that this fund has 99% of its holding in Govt tresuries which makes the fund slightly less susceptible to interest rates. (Total Bond has 60% US Gov't treasuries).
This isn't how it works. Two bonds of the same duration will have the same sensitivity to interest rates, whether government-issued or corporate.

The prime difference between Treasurys and corporate bonds is that Treasurys have no credit risk. You will get paid back. Both have interest rate risk.

(There's a nit in there about some corporates being callable which I've ignored for simplicity)

Topic Author
Cody
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Joined: Sun Dec 02, 2007 9:19 am
Location: Stillwater, Mn

Re: Is it necessary to use both Total Bond Fund and Intermediate-Term Treasury

Post by Cody » Mon Jun 29, 2020 12:27 pm

Is the reason you are mentioning Corporate Bond because TB has some of those in their fund?

And then too, could you describe how bond funds deal with interest rate hikes that might benifit the long term investor?

Thx

dbr
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Re: Is it necessary to use both Total Bond Fund and Intermediate-Term Treasury

Post by dbr » Mon Jun 29, 2020 12:59 pm

You are asking something similar to after I was served the vanilla ice-cream is it also necessary to order a dish of chocolate? The answer to that is absolutely yes, because adding chocolate to things neutralizes the effects of fat and sugar in the diet.

But, seriously, of course it is not necessary. Why would you think so? People hold or suggest all sorts of choices in bonds pretty much none of which are necessary. Somebody listing something in an example portfolio is no way to choose investments.

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