We live in interesting times in bond land, as if that needs repeating on this forum. The yield curve is relatively steep and it hasn't changed much overall since the bloodletting last summer, which seldom if ever happens. This has provided us a live experiment showing how bond funds (or narrow ladders) can get additional returns from the steepness of the yield curve.
Back in July, stlutz started this thread "Treasuries, CDs, and Munis reconsidered", which was to me very instructive. It was about a thought experiment on how much extra return you can get by rolling bonds before maturity and how this can be significantly higher than the SEC yield, or the alternate instruments available at the time.
Well, the market has given us the action needed to back up this thought experiment. Today the 5 year Treasury yield is 1.47%. The first time it reached that figure was June 24, 2013, when it ended at 1.48%. Furthermore, the yield curve has remained steep since, in fact slightly steeper:
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3Yr 5Yr 10Yr 06/24/2013 0.73 1.48 2.57 02/07/2014 0.66 1.47 2.71
This is much more than the fund's SEC yield, either now or then, which is in the neighborhood of 1.4% - 1.6% depending on how you choose to read the 30 day smoothing. It's also much more than the CDs available at the time, and after state taxes it probably beats the fabled PenFed CD as well. VFIUX had no right to earn this much, except by the curve riding effect.
Lest you think that the managers of VFIUX did something funny and simply got lucky, take a look at:
VGIT (indexed, Treasuries + Agency MBS, slightly shorter): 1.72%, annualized 2.77%
IEI (Barclay's 3-7 Treasury index, shorter): 1.65%, annualized 2.65%
So everyone riding the curve in the intermediate range made quite a bit more than they were supposed to. Say what you will about uncertain bond times, but I like making 60% more than what I was promised, while the prospects going forward (yields) have stayed the same, i.e. no "bond bull market".
Disclaimer: because yields were so incredibly volatile in June 2013, these numbers change if going back and forward even a few days; for example, it's possible that the snapshots of morningstar and treasury.gov from the same date reflect different intraday numbers. I would have liked to have more stable numbers at that end, but it's a luxury that the bond market has not given us yet for a start - end interval that I'd consider long enough. We might get better comparisons in the future. The other disclaimer is that I still hold the belief I stated in that thread, which is that the yield curve cannot be expected to stay steep. But when it does, we profit.
Anyway, I think it's hard to dispute that real life returns have validated the curve riding bonus. Thanks again stlutz for drawing our attention to it on the theoretical level before the returns started coming in.