Total face value of all bonds in Total Bond = 98.1% of current value

[nisiprius]

I went to
advisors.vanguard.com >> search for BND >> portfolio >> holdings details
which lists face and market values for its 17,194 holdings:



I clicked the "export full holdings," opened it in Excel, and was able to strike totals.

1) As of 3/31/2022:

Total face value: $296,344,367,296.89
Total market value: $301,952,316,721.49

Face value as percent of market value: 98.1%

2) A cursory quick Google search turned up a statement that according to Moody's, the long-term default rate for BBB/Baa-rated bonds--the lowest investment grade bonds--has been about 0.3%. So, less than that for Total Bond's average-AA Treasury-heavy portfolio, but let's say 0.3%

So far, facts.

3) I am going to interpret this naïvely as setting some rough floor on how bad things could possibly get.

The face value of the bonds in the fund is 98.1% of the current total market value. I believe that 99.7% of the bonds currently held in the fund will pay out their face value someday. (Usually this would be at their maturity date but in the case of mortgage-backed securities it could be earlier.) Therefore, the current holdings are sufficient to pay out 99.7% of 98.1% = 97.8% of the current value of the fund just by maturing... not including the coupon interest they will pay.

I am not as naïve (or dishonest) as to say the downside is limited to -2.2% because all of the bonds have various times to maturity, and every bond in a bond fund has a fluctuating market value subject to interest rates. And we know that BND has already fallen much farther than that. And bond funds sell their bonds before maturity, and by the time they sell them, they will have replaced them with new bonds, and so on and so on. And by the time they pay out, inflation will have reduced their real value.

Nevertheless, I think it is relevant to observe that, based on assumptions of low default rates for investment grade bonds, the face values of the bonds currently in Total Bond are adequate to pay out 97.8% of the current market value of the fund.

4) This is not a short-term prediction tool! With a 6.9-year maturity, the value of the fund could easily jink up and down by ±7% if the relevant interest rates jink up and down by 1%.

I am a buy-and-hold investor who intends to hold Total Bond for a time frame of its 6.9-year duration--or, let's say, the "4-10 years" Vanguard says "may" be appropriate. I would not use the total face value to judge that the fund is overvalued or undervalued, "expensive" or "cheap," or that it is a "good time" to buy/sell/short/leverage/whatever.

All I am saying that most of the dollar value of the fund is solidly supported by principal value inside the bonds. Dollar values that are locked and inaccessible, but almost certainly there.

[rkhusky]

And 1.1% is in cash.

Edit: Wonder why the summary says it holds 10153 bonds, but the listing has 17194 entries?

[mega317]

Thank you for this interesting post. Any idea what the analysis would have looked like last summer?

[nisiprius]

Thank you for this interesting post. Any idea what the analysis would have looked like last summer?

Yeah, the website goes back for a year. For 6/30/2021:

Total face value $311,275,732,291.12
Total market value $291,972,480,709.37
Market value = 106.6% of face

Again, I can't emphasize this too much, 1) the market value is going to fluctuate, 2) this isn't a prediction tool.

It just gives me a vague rough fundamental reassurance. Like it's really hard for me to imagine a -50% drop, because that would imply to a total fund asset value of $150 billion even though the bonds in the fund collectively have a face value of $300 trillion and are almost certain to pay it out.

[mega317]

Yeah, the website goes back for a year.

Oof, suppose I could have clicked instead of asking for more free fish. Thank you.

[nisiprius]

And 1.1% is in cash.

Edit: Wonder why the summary says it holds 10153 bonds, but the listing has 17194 entries?

Good question. I don't know.

Also, the holdings for 6/30/2021 and 11/30/2021 have a handful of red entries at the bottom, holdings with negative values shown both for face value and market value. I wasn't sure what to do so I included them. Hey, they're only $150 million or so so no big deal, right? (Less than 0.01% of the fund)

[cas]

I am not as naïve (or dishonest) as to say the downside is limited to -2.2% because all of the bonds have various times to maturity, and every bond in a bond fund has a fluctuating market value subject to interest rates. And we know that BND has already fallen much farther than that. And bond funds sell their bonds before maturity, and by the time they sell them, they will have replaced them with new bonds, and so on and so on. And by the time they pay out, inflation will have reduced their real value.

[. . .]

I am a buy-and-hold investor who intends to hold Total Bond for a time frame of its 6.9-year duration

An additional data point: Morningstar data shows that, thus far, VBTLX has, generally, had more inflows than outflows each month this year. Definitely decreased level of net inflow compared to previous years, but still generally in net inflow rather than net outflow. (To see this data: Scroll down on the Morningstar "Quote" page for VBTLX to the graphs. Center graph, which is easily missed by my eye, shows monthly net inflow/outflow.)

So, thus far, it would seem that holders of the fund are, at a high aggregate level, generally sticking to buy-and-hold as well. Or at least aren't forcing the fund to sell holdings (to meet redemptions) without being able to replace them.

[JoMoney]

If you're willing to hold a bond or portfolio of bonds to maturity, you need not be concerned about the current market value. Return of principal plus interest is literally what a bond promises.

If you had no intention of holding onto your bond portfolio to maturity, but instead were buying longer term bonds with the intention that you were going to trade in and out of them before maturity, hoping for some sort of "rebalancing bonus" or uncorrelated "portfolio effect" when mixed with stocks, that was never something the bond guaranteed.

[Riprap]

If you're willing to hold a bond or portfolio of bonds to maturity, you need not be concerned about the current market value. Return of principal plus interest is literally what a bond promises.

Does the typical fund hold to maturity or does it typically sell prior to maturity to manage overall portfolio duration and quality? Or does it matter?

[nisiprius]

...Does the typical fund hold to maturity or does it typically sell prior to maturity to manage overall portfolio duration and quality? Or does it matter?...

People have said that funds don't hold to maturity nor buy at issue. But I've never seen any details. It seems to be an area, not exactly of "trade secrets," but craft knowledge or something. I once bought a Kindle copy of Frank Fabozzi's The Handbook of Fixed Income Securities, and I once at least skimmed Annette Thau's The Bond Book, and at times have looked for any simple model and not found any.

[Riprap]

People have said that funds don't hold to maturity nor sell at issue.

Did you mean buy?

I suspect funds just sort of muddle through, juggling purchases, redemptions, shifting maturities.

[sycamore]

If you're willing to hold a bond or portfolio of bonds to maturity, you need not be concerned about the current market value. Return of principal plus interest is literally what a bond promises.

Does the typical fund hold to maturity or does it typically sell prior to maturity to manage overall portfolio duration and quality? Or does it matter?

My hunch is bond funds are too varied to say what a "typical" fund does.

Are you asking about actively managed bond funds or passive/index funds?

For index bond funds like Total Bond Market, look to the fund's index: if the index says a particular bond should age out or otherwise be dropped, the fund would sell. Tracking the index is top priority for index bond funds.

[Riprap]

Are you asking about actively managed bond funds or passive/index funds?

Both I guess. JoMoney's post made me wonder is all.

Logistically, maybe it's easier to sell in the market than collect from the issuer, I have no idea.

[nisiprius]

People have said that funds don't hold to maturity nor sell at issue.

Did you mean buy?

I did.

I suspect funds just sort of muddle through, juggling purchases, redemptions, shifting maturities.

I think there is some specific consideration as bonds get close to maturity, where it is possible to spot obvious valid market timing opportunities and eke out some gain through active management. I've heard people say something like that. Dunno.

I recently read The Bond King, by Mary Childs, about Bill Gross. A very interesting book. It did not raise my opinion of Bill Gross. However, I hadn't completely understood what he did, and his major achievement. She characterizes it thus:

He’d joined the stable world of bond investing, paper resting in a vault, and had helped transform it into a casino.

The reason why his famous fund was called the PIMCO Total Return Fund was to emphasize that he did not propose just to set there and let bonds mature and collect interest. Total return = interest + return of principal at maturity + capital appreciation. Price appreciation is a speculative gain through timing. He wanted to achieve a higher total return than you could get just by sitting there. He was promising to garner capital appreciation, through active trading, taking money away from other bond traders. In a sense he invented the whole idea of bond "trading."

He’d taught disciples to play like he did; his enthusiastic embrace of mortgages, derivatives, and complicated structures had charged their growth.

But much as it sticks in my craw, the difference between PTTRX (blue) and Total Bond (red) during the time Gross was managing it (and it outlasted his departure) was not the end result of just letting bonds sit and collecting their interest and repayment of principal.

Source



Maybe if you dug you could find a clear set of rules for how the Bloomberg Aggregate Index adds and removes bonds from the index. Since it includes bonds of all terms, it might be fairly close to just passively buying close to issue and holding to maturity. Clearly the "core-plus" bond funds, like PTTRX, are not doing that. Nor are they restricting themselves to investment-grade bonds.

[#Cruncher]

As of 3/31/2022:
Total face value: $296,344,367,296.89
Total market value: $301,952,316,721.49
Face value as percent of market value: 98.1%
...
Therefore, [after allowing for 0.3% defaults] the current holdings are sufficient to pay out 99.7% of 98.1% = 97.8% of the current value of the fund just by maturing... not including the coupon interest they will pay.
...
All I am saying that most of the dollar value of the fund is solidly supported by principal value inside the bonds. Dollar values that are locked and inaccessible, but almost certainly there. (underline added)

I can only interpret the underlined portion to mean -- if it means anything at all -- that somehow a bond with a higher ratio of face value to market value is somehow safer. This would mean that bonds selling at a discount are safer than ones selling at a premium. But drilling down on this assertion shows that it really makes no sense.

The price of a bond (i.e., the inverse of the face value to market value ratio) generally depends on the relationship between the bond's coupon and its yield-to-maturity (YTM). Consider the following comparison of two 8-year bonds each with a $10,000 face value: one with no coupon and the other with a 6% coupon. Row 8 shows that the zero-coupon bond has a face:market ratio of 126.7% while the 6% coupon has a ratio of only 85.6%. Does this mean the zero-coupon bond is safer?

In economic terms it would make just as much sense to say the 6% coupon bond has a "face" value of $14,800 composed of $10,000 of principal and eight $600 coupon payments. [1] If we use this $14,800 as the "face" value, row 11 shows the 6% coupon bond has the same 126.7% face value to market value ratio as the zero-coupon bond. This shows that the 6% coupon bond really is just as "safe" as the zero-coupon bond.

Code: Select all

Row                  Col A       Col B       Col C   Formula in col B copied to col C
  1             Face value      10,000
  2             Settlement   1/01/2022
  3      Yield to maturity     3.0000%     3.5465%  [2]
  4               Maturity   1/01/2030   1/01/2030
  5                 Coupon          -        6.00%
  6                  Price       78.94      116.83  =PRICE($B2,B4,B5,B3,100,1,1)
  7           Market value       7,894      11,683  =$B1*(B6/100)
  8       Face % of market      126.7% <===> 85.6%  =$B1/B7
  9          Coupon "face"          -        4,800  =$B1*B5*(YEAR(B4)-YEAR($B2))
 10           Total "face"      10,000      14,800  =$B1+B9
 11  Total "face" % of mkt      126.7% <==> 126.7%  =B10/B7

1. Imagine the $10,000 6% bond being replaced by nine zero-coupon bonds: eight with $600 face value maturing in one, two, ..., seven, and eight years plus one with $10,000 face maturing in eight years.
2. The only reason I chose this strange 3.5465% yield was to make the two ratios on row 11 come out the same. This isn't necessary for my argument.

[nisiprius]

As of 3/31/2022:
Total face value: $296,344,367,296.89
Total market value: $301,952,316,721.49
Face value as percent of market value: 98.1%
...
Therefore, [after allowing for 0.3% defaults] the current holdings are sufficient to pay out 99.7% of 98.1% = 97.8% of the current value of the fund just by maturing... not including the coupon interest they will pay.
...
All I am saying that most of the dollar value of the fund is solidly supported by principal value inside the bonds. Dollar values that are locked and inaccessible, but almost certainly there. (underline added)

I can only interpret the underlined portion to mean -- if it means anything at all -- that somehow a bond with a higher ratio of face value to market value is somehow safer. This would mean that bonds selling at a discount are safer than ones selling at a premium...

I am painting with a much broader brush than you are. My point is that people see stocks and bonds as having a fluctuating value that are not essentially different. We see posts asking whether bonds are actually safer than stocks.

I am not suggesting that you can compare bond funds by total face value to market value. I actually pointed out that a few months ago, the face value total of Total Bond was 106.6% of face value.

I'm just suggesting that the fact that a bond fund has a visible internal dollar value, that you can't get at but that is bound to leak out over the average maturity of the bonds, puts a plausible numeric floor under how bad it could get. To put it another way... I'm out of my accounting/financial/economics depth here, but I think I'm saying that the book-to-market ratio for Total Bond is roughly 1.0?

[jjj_22]

I'm just suggesting that the fact that a bond fund has a visible internal dollar value, that you can't get at but that is bound to leak out over the average maturity of the bonds, puts a plausible numeric floor under how bad it could get. To put it another way... I'm out of my accounting/financial/economics depth here, but I think I'm saying that the book-to-market ratio for Total Bond is roughly 1.0?

I think implicit in what you're describing as the "internal dollar value ... leak[ing] out over the average maturity of the bonds," is that the "internal dollar value" is not current dollars, they're future dollars. You have to discount that to get a present value that means anything. Discounting just leads us back to the same hand-wringing over "where are interest rates going?!" that all bond conversations seem to devolve into.

[bertilak]

Could it be that some of the face value of a bond fund is the cost of the convenience of owning the fund as opposed to managing all those bonds by yourself?

[manuvns]

market is over reacting to inflation scare , just buy as much bonds as you can .