What is going on with short-term taxable bonds?

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What is going on with short-term taxable bonds?

Post by grabiner » Sat Aug 01, 2020 11:42 am

Normally, bond yields on funds of comparable duration should reflect the risk of the bonds, but the current yields on Vanguard's short-term funds don't reflect this.

All yields are on Admiral shares, which have expenses between 0.07% and 0.10%. In increasing order of risk:

Short-Term Treasury: 0.01%
Short-Term Treasury Index: 0.10% (slightly more risk for longer duration than Short-Term Treasury)
Short-Term Federal: 1.09% (some call risk on mortgage bonds, and mostly not backed by full faith and credit)
Short-Term Bond Index: 0.39% (66% Treasuries, 34% corporates)
Short-Term Investment-Grade: 1.33% (36% rated A, 31% rated BBB, 3% junk or not rated)
Short-Term Corporate Bond Index: 0.98% (45% rated A, 46% rated BBB)

Treasury yields may be artificially depressed, which accounts for the low yield on Short-Term Bond Index. Still, it doesn't make sense that Short-Term Federal, which holds mostly bonds with implicit government guarantees (such as FNMA and FHLMC), has a higher SEC yield than Short-Term Corporate Bond Index, which holds almost half its bonds in BBB corporates. In addition, I don't see why Short-Term Investment-Grade has a higher yield than Short-Term Corporate Bond Index; the index has a slightly longer duration and lower quality.

For intermediate-term bonds, the yields are in the right order. Corporate bonds yield more than GNMAs, and Intermediate-Term Corporate Bond Index, with slightly lower quality and a slightly longer duration, has a higher yield than Intermediate-Term Investment-Grade (1.73% versus 1.59%).
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Re: What is going on with short-term taxable bonds?

Post by Doc » Sat Aug 01, 2020 12:57 pm

grabiner wrote:
Sat Aug 01, 2020 11:42 am
Still, it doesn't make sense that Short-Term Federal, which holds mostly bonds with implicit government guarantees (such as FNMA and FHLMC), has a higher SEC yield than Short-Term Corporate Bond Index, which holds almost half its bonds in BBB corporates.
I'm missing something.

Name, Ticker, Asset class, SEC yield, 2nd quarter 2020
Short-Term Federal, VSGBX Bond - Short-term Government, 0.99% A 30 day 7/29/2020, 1.01%
Short-Term Corporate Bond Index Admiral Shares, VSCSX, Bond - Short-term Investment, 0.98% A 30 day 7/29/2020, 5.55%

I think that because of the recovery from the March kerfuffle that short term metrics are distorted by the bottoms of different assets not occuring at the same time. A lot of 30 day SEC or even 90 day returns look weird because of different bottoms. I currently use year to date periods to get around this distortion.
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Re: What is going on with short-term taxable bonds?

Post by grabiner » Sat Aug 01, 2020 1:05 pm

Doc wrote:
Sat Aug 01, 2020 12:57 pm
grabiner wrote:
Sat Aug 01, 2020 11:42 am
Still, it doesn't make sense that Short-Term Federal, which holds mostly bonds with implicit government guarantees (such as FNMA and FHLMC), has a higher SEC yield than Short-Term Corporate Bond Index, which holds almost half its bonds in BBB corporates.
I'm missing something.

Name, Ticker, Asset class, SEC yield, 2nd quarter 2020
Short-Term Federal, VSGBX Bond - Short-term Government, 0.99% A 30 day 7/29/2020, 1.01%
Short-Term Corporate Bond Index Admiral Shares, VSCSX, Bond - Short-term Investment, 0.98% A 30 day 7/29/2020, 5.55%
I used Admiral shares of Short-Term Federal for comparison, so that the expenses are closer; this is where I get the 1.09% yield.
I think that because of the recovery from the March kerfuffle that short term metrics are distorted by the bottoms of different assets not occuring at the same time. A lot of 30 day SEC or even 90 day returns look weird because of different bottoms. I currently use year to date periods to get around this distortion.
That would explain the returns, but not the yields; the 30-day SEC yields should be based on bond prices (and yields) from July.

I did check a chart; Short-Term Federal didn't lose anything in March, while Short-Term Corporate Bond Index lost 8% top to bottom but made it up from the end of March through July. The two funds have essentially the same return since March 5, which was the day the corporate collapse begin.
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Re: What is going on with short-term taxable bonds?

Post by Doc » Sat Aug 01, 2020 1:26 pm

grabiner wrote:
Sat Aug 01, 2020 1:05 pm
I think that because of the recovery from the March kerfuffle that short term metrics are distorted by the bottoms of different assets not occuring at the same time. A lot of 30 day SEC or even 90 day returns look weird because of different bottoms. I currently use year to date periods to get around this distortion.
That would explain the returns, but not the yields; the 30-day SEC yields should be based on bond prices (and yields) from July.
If 30 days ago one had recovered more than another (different bottoms) the 30 day SEC yields would not really be measuring the same thing.

Eg, Week ending price:

20, 20, 25, 25, 30

vs

20, 25, 25, 25, 30

I haven't really pursued this idea but in general the 30 Day SEC yields seem distorted lately while the YTD yields seem OK.

(Caveat, I may not be interpreting the SEC yield formula correctly.)
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Re: What is going on with short-term taxable bonds?

Post by jeffyscott » Sat Aug 01, 2020 3:27 pm

I think SEC yield may sometimes give odd, flawed results. I do not know why, but I think that is what is happening here.

On Vanguard's portfolio tab, there is a YTM reported, for short term federal (VSGDX) this is 0.8%. Unfortunately, this has not been updated, so that 0.8% is as of 6/30. However, when you do a search of past price on the "Price and Performance" tab, it will also show the historical SEC yield. So as of 6/30, this shows SEC yield for short term federal (VSGDX) was 1.4%, which is 0.6% higher than the YTM.

For short term corp, the YTM and SEC yields match. As of 6/30 SEC was 1.21% and YTM was 1.2%.

OTOH, there was no net change in price for VSGDX in July and total return over the past month was 0.11%, so that would be about 1.3% annualized and so is in line with the SEC yield rather than the YTM from 6/30. :confused
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Re: What is going on with short-term taxable bonds?

Post by Northern Flicker » Sat Aug 01, 2020 5:05 pm

I think three things are in play.

1. SEC yield is a 30-day moving average, leading to some distortions in the comparison (as mentioned above).

2. There may be (being generous with the verb) some market distortions being caused by the Federal Reserve, especially for corporate credit, but also for treasuries.

3. Call risk for mortgages is high right now. You may be getting a wide spread as a premium for that because the market may think you will not get the premium for very long.
Last edited by Northern Flicker on Sat Aug 01, 2020 11:49 pm, edited 1 time in total.
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Re: What is going on with short-term taxable bonds?

Post by livesoft » Sat Aug 01, 2020 5:09 pm

I think the numbers are probably updated on different days by different people within Vanguard, so that they are stale and meaningless at this level of lack of detail.
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Re: What is going on with short-term taxable bonds?

Post by Northern Flicker » Sat Aug 01, 2020 11:50 pm

livesoft wrote:
Sat Aug 01, 2020 5:09 pm
I think the numbers are probably updated on different days by different people within Vanguard, so that they are stale and meaningless at this level of lack of detail.
That would have a very small impact on 30-day moving averages.
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Re: What is going on with short-term taxable bonds?

Post by xenial » Sun Aug 02, 2020 12:40 am

Vanguard's reported SEC yields are suspect. The corporate ETFs are especially funky. As of 7/29, Short Corporate (VCSH) yields 1.00%, Intermediate Corporate (VCIT) yields 1.75%, Long Corporate (VCLT) yields 2.83%, and Total Corporate (VTC) yields 3.05%. The problem is that Total Corporate invests exclusively in the other three ETFs. It's a miracle!

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Re: What is going on with short-term taxable bonds?

Post by Steve Reading » Sun Aug 02, 2020 12:51 am

xenial wrote:
Sun Aug 02, 2020 12:40 am
Vanguard's reported SEC yields are suspect. The corporate ETFs are especially funky. As of 7/29, Short Corporate (VCSH) yields 1.00%, Intermediate Corporate (VCIT) yields 1.75%, Long Corporate (VCLT) yields 2.83%, and Total Corporate (VTC) yields 3.05%. The problem is that Total Corporate invests exclusively in the other three ETFs. It's a miracle!
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Re: What is going on with short-term taxable bonds?

Post by grabiner » Sun Aug 02, 2020 9:19 am

xenial wrote:
Sun Aug 02, 2020 12:40 am
Vanguard's reported SEC yields are suspect. The corporate ETFs are especially funky. As of 7/29, Short Corporate (VCSH) yields 1.00%, Intermediate Corporate (VCIT) yields 1.75%, Long Corporate (VCLT) yields 2.83%, and Total Corporate (VTC) yields 3.05%. The problem is that Total Corporate invests exclusively in the other three ETFs. It's a miracle!
Vanguard explains this anomaly with the notes on the fund page. VTC reports an SEC yield under definition B (based on the yields of the underlying holdings), as if it were a stock fund, rather than definition A (based on past 30 days' yield to maturity). Since the ETFs have a higher dividend payout than their SEC yield, VTC uses that dividend payout to report a higher SEC yield.

The reported yields to maturity (select "Bond Attributes" from the fund list) make sense: 1.2% for Short-Term Corporate, 2.0% for Intermediate-Term Corporate, 3.2% for Long-Term Corporate, and 2.2% for Total Corporate. These are all as of June 30, and except for VTC, they are slightly higher than the July 31 SEC yield, reflecting a decline in rates over the last month.

The yields to maturity for the short-term fund make a little more sense, but still don't resolve the anomaly:

Short-Term Treasury: 0.2%
Short-Term Treasury Index: 0.2%
Short-Term Federal: 0.8% (lower than reported SEC yield)
Short-Term Bond Index: 0.5%
Short-Term Investment Grade: 1.3% (about equal to reported SEC yield)
Short-Term Corporate Index: 1.2%

Short-Term Investment-Grade and Short-Term Corporate Index have essentially the same July returns, so the difference between their yields shouldn't increase in July unless there was substantial turnover in which bonds were sold and replaced by other bonds with different yields. (This could happen in theory; Short-Term Corporate Index must sell bonds when they are downgraded to BB, and replace them with lower-yielding bonds, while Short-Term Investment-Grade can keep a small amount in BB-rated bonds.)
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Re: What is going on with short-term taxable bonds?

Post by Northern Flicker » Sun Aug 02, 2020 1:34 pm

I assume the yield-to-maturity of Short-term-federal is lower than SEC yield because the SEC yield is a 30-day moving average and the yields of what it holds have fallen in the last week.

I'm currently unclear if the topic in the thread is about anomalies in reported data, surprising variations in the yields of different assets, or both.
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Re: What is going on with short-term taxable bonds?

Post by Doc » Sun Aug 02, 2020 3:50 pm

Northern Flicker wrote:
Sun Aug 02, 2020 1:34 pm
I assume the yield-to-maturity of Short-term-federal is lower than SEC yield because the SEC yield is a 30-day moving average and the yields of what it holds have fallen in the last week.
The SEC yield takes the dividends and interest received over the past 30 days net of the accrued expenses divided by the funds assets (sort of) at the end of the period and annualizes it. (The annualization calc is kind of weird is kind of weird. It uses the 30 day rate raised to the sixth power and multiplies by 2.)

I speculate that weirdness might be due to using the highest price on the last day times the average daily number of shares as the funds assets. If the price was out of whack on the last day of the period the SEC yield would be out of whack proportionately.

The formula for SEC 30-day yield is

Image

Where:

a = dividends and interest collected during the past 30 days
b = accrued expenses of the past 30 days
c = average daily number of outstanding shares that were entitled to distributions
d = the maximum public offering price per share on the last day of the period

https://en.wikipedia.org/wiki/30-day_yield

David Grabiner should be able to tell us. He's the math guy. Oh gee whiz it's his thread and his question. :D
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Re: What is going on with short-term taxable bonds?

Post by jeffyscott » Sun Aug 02, 2020 4:38 pm

Doc wrote:
Sun Aug 02, 2020 3:50 pm
Northern Flicker wrote:
Sun Aug 02, 2020 1:34 pm
I assume the yield-to-maturity of Short-term-federal is lower than SEC yield because the SEC yield is a 30-day moving average and the yields of what it holds have fallen in the last week.
The SEC yield takes the dividends and interest received over the past 30 days net of the accrued expenses divided by the funds assets (sort of) at the end of the period and annualizes it. (The annualization calc is kind of weird is kind of weird. It uses the 30 day rate raised to the sixth power and multiplies by 2.)

I speculate that weirdness might be due to using the highest price on the last day times the average daily number of shares as the funds assets. If the price was out of whack on the last day of the period the SEC yield would be out of whack proportionately.

The formula for SEC 30-day yield is

Image

Where:

a = dividends and interest collected during the past 30 days
b = accrued expenses of the past 30 days
c = average daily number of outstanding shares that were entitled to distributions
d = the maximum public offering price per share on the last day of the period

https://en.wikipedia.org/wiki/30-day_yield

David Grabiner should be able to tell us. He's the math guy. Oh gee whiz it's his thread and his question. :D
But the wording used to define the term "a" is not the best. As noted here: https://www.bogleheads.org/wiki/SEC_Yield
The SEC also includes clarifications of the definition. In particular, "Dividends and interest" for a bond is computed from yield to maturity, or yield to call if the bond is likely to be called, not the coupon payments on the bond.

Or as stated here: https://www.calamos.com/globalassets/me ... _final.pdf
The calculation uses the current yields to worst of all fixed income portfolio holdings

Or from the horses mouth:
Image
https://www.sec.gov/files/formn-1a.pdf
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Re: What is going on with short-term taxable bonds?

Post by Doc » Sun Aug 02, 2020 4:59 pm

jeffyscott wrote:
Sun Aug 02, 2020 4:38 pm
Or from the horses mouth: ...
OMG
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Re: What is going on with short-term taxable bonds?

Post by Northern Flicker » Sun Aug 02, 2020 5:24 pm

The formula says the following:

1. Use 30 days of net income divided by total fund balance/principal at end of the period as an estimate of internal rate of return over the period. A precise number would require calculating IRR using the fund balance at the time of each cash flow.

2. Compound that monthly rate for 6 months.

3. Double the result of step 2 to reach an annualized rate that will be a little bit lower than if the 30-day rate were compounded for 12 months. This may be done to account for the loss of compounding when dividends are distributed. Of course you can reinvest the distribution to continue compounding your personal return, but that does not change the compound yield of the fund itself.

The only area where there is any real discrepancy introduced by the formula is using the fund balance at the end of the 30-day period as an estimate for the fund balance at the time of each cash flow, and compounding the rate associated with each cash flow. This effect is lower when rates are lower, so should be neglible compared to the delay in incorporating rate changes into the 30-day average when rates are moving duribg the 30 days.

Intermediate-term mortgage option-adjusted spreads (spreads that price credit risk and the premium received for prepayment options) seem to be around 100 bp right now, so a 50-60 bp spread for shorter duration instruments does not seem outrageously high in comparison-- maybe a little higher than I would expect.

If you look at VFIUX it only needs to hold 80% of its portfolio in treasuries. It has about 16% of its assets in MBS and ABS, which is reflected in its higher yield than VSIGX which is a treasury index fund.
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Re: What is going on with short-term taxable bonds?

Post by grabiner » Sun Aug 02, 2020 5:47 pm

Northern Flicker wrote:
Sun Aug 02, 2020 5:24 pm
The formula says the following:

1. Use 30 days of net income divided by total fund balance/principal at end of the period as an estimate of internal rate of return over the period. A precise number would require calculating IRR using the fund balance at the time of each cash flow.

2. Compound that monthly rate for 6 months.

3. Double the result of step 2 to reach an annualized rate that will be a little bit lower than if the 30-day rate were compounded for 12 months. This may be done to account for the loss of compounding when dividends are distributed. Of course you can reinvest the distribution to continue compounding your personal return, but that does not change the compound yield of the fund itself.
The reason for #3 is to match the way bonds usually work. A $1000 bond with a 6% coupon pays a $30 coupon every six months, which is treated by rules #1 and #2 as accruing at a 0.494% monthly rate. If the bond is trading at par, it is quoted as having a 3% semiannual yield, which is reported as a 6% SEC yield, even though your annual return would be 6.09% if you reinvested the coupon at 6% interest.
If you look at VFIUX it only needs to hold 80% of its portfolio in treasuries. It has about 16% of its assets in MBS and ABS, which is reflected in its higher yield than VSIGX which is a treasury index fund.
The same thing applies to the short-term funds; Vanguard Short-Term Treasury is only 89% Treasury bonds. This helps to explain why it has a higher yield than the index.
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Re: What is going on with short-term taxable bonds?

Post by Kevin M » Sun Aug 02, 2020 5:59 pm

jeffyscott wrote:
Sun Aug 02, 2020 4:38 pm
Doc wrote:
Sun Aug 02, 2020 3:50 pm
The SEC yield takes the dividends and interest received over the past 30 days net of the accrued expenses divided by the funds assets (sort of) at the end of the period and annualizes it.
<snip>
The formula for SEC 30-day yield is

Image

Where:

a = dividends and interest collected during the past 30 days

<snip>

https://en.wikipedia.org/wiki/30-day_yield
<snip>
But the wording used to define the term "a" is not the best.
<snip>
It's worse than that--the Wikipedia article leaves out the most important part of how "a" is calculated for a bond fund.

I think the Wikipedia article is flat out wrong in this statement:
Wikipedia wrote:It is not the same as the yield to maturity for the bonds in the portfolio, as it does not take into account the amortization of the premiums or discounts at which the bonds are trading.
To highlight the relevant part of the SEC 30-day yield calculation, as shown in the graphic above shared by jeffyscott:
SEC wrote:To calculate interest earned on debt obligations for purposes of “a” above:

(a) Calculate the yield to maturity of each obligation held by the Fund based on the market value of the obligation
Yield to maturity most certainly does "take into account the amortization of the premiums or discounts at which the bonds are trading". It appears to me that whoever wrote that part of the Wikipedia article doesn't really understand the 30-day yield calculation.

SEC yield for bond funds most certainly is a form of yield to maturity--it's basically a 30-day lagging average YTM minus expenses.

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Re: What is going on with short-term taxable bonds?

Post by jeffyscott » Sun Aug 02, 2020 9:49 pm

Kevin M wrote:
Sun Aug 02, 2020 5:59 pm
SEC yield for bond funds most certainly is a form of yield to maturity--it's basically a 30-day lagging average YTM minus expenses.

Kevin
If I understand correctly, though, it's not an average of each day's YTM, where each day's YTM would be based on that day's NAV.

Taking a single bond on the last day of the month, let's say it's YTM is 1% and market value is $1100, that's step 1.(a) from the SEC instructions. Then 1.(b) calculates the daily interest earned, based on that YTM, which would be ($1100)(0.01)/360 = $0.030556 or $0.91667 for 30 days.

That $0.91667 would be the interest earned by that bond, the "a" in the SEC formula (assuming it's one that is not affected by any of the other instructions that go with the SEC formula).

One thing that seems odd is that it says to use the purchase price, not the market value "with respect to obligations purchased during the month". So it seems that if the bond with a value of $1100 in my example had been purchased for, say $1050 sometime during the month, that $1050 purchase price rather than the $1100 end of month market value would be used to calculate the YTM.
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Re: What is going on with short-term taxable bonds?

Post by Northern Flicker » Mon Aug 03, 2020 12:21 pm

jeffyscott wrote: If I understand correctly, though, it's not an average of each day's YTM, where each day's YTM would be based on that day's NAV.
Correct. Suppose large net inflows to the fund occur at the end of the 30-day period. It will then underestimate the contribution to yield of cash flows that occurred in the 30-day window before the inflows. Large net outflows would have the opposite effect.
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