Total Bond vs Intermediate Treasuries?

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Nearly A Moose
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Total Bond vs Intermediate Treasuries?

Post by Nearly A Moose » Tue Jun 07, 2016 9:50 am

Could a few of the fixed income experts help me understand the trade offs between a total bond fund and an intermediate treasuries fund? (Think Vanguard Total Bond (VBTLX) and Vanguard Intermediate Term Treasuries (VFITX), ignore admiral versus regular). Based on some back testing (with the caveat that back testing doesn't say what will happen in the future), it looks like Intermediate Treasuries tends to perform better than total bond, and portfolios that I construct using all intermediate treasuries as the fixed income portion appear to have higher CAGR, lower volatility, and better Sharpe/Sortino ratios than those with total
Bond.

So, what am I missing here? Under what situations does one perform better than the other, and is it nuts to hold only intermediate te treasuries for fixed income? For example, I haven't lived through high inflation or high interest years. Could that be a relevant distinction? (Ps, I've read the wiki, so I understand the holdings are different. I just don't have a good command for how these should be expected to behave under different situations.) Thanks!

Edit: As I understand it, interest from Treasury Bonds is exempt from state income tax, but not federal income tax. I'm in a high marginal rate with a high marginal state rate. It still doesn't seem that holding this in a taxable account creates advantages over a tax deferred account, but I thought I'd throw that out there.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

Nearly A Moose
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Re: Total Bond vs Intermediate Treasuries?

Post by Nearly A Moose » Tue Jun 07, 2016 10:24 am

Replying to my own post since I remembered there's a search bar :oops:

Looks like there's been a lot of discussion, such as this one: viewtopic.php?t=170854

Would still appreciate any additional thoughts, but it looks like it's a matter of preference...
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

lostdog
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Re: Total Bond vs Intermediate Treasuries?

Post by lostdog » Tue Jun 07, 2016 10:55 am

I picked the fund because I am more comfortable with the 50/50 between corporate and government bonds and it does not contain mortgages.

I am talking about this fund:

Intermediate-Term Bond Index Fund
https://personal.vanguard.com/us/funds/ ... IntExt=INT

BigJohn
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Re: Total Bond vs Intermediate Treasuries?

Post by BigJohn » Tue Jun 07, 2016 11:17 am

Like lostdog I use VG Intermediate Term Bond Index for similar reasons. I also don't like how much the composition of TBM moves around based on Fed and other government agency actions viewtopic.php?p=2652414#p2652414. However, my guess is that 20+ years from now the difference will be negligible as long as you stick with a high quality, low cost, intermediate term bond fund.

Lots of other discussion on the pros/cons of various choices. Here are a couple more to get you started but there are links to others in threads below as well.
viewtopic.php?p=2722942
viewtopic.php?p=2663988

Nearly A Moose
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Re: Total Bond vs Intermediate Treasuries?

Post by Nearly A Moose » Tue Jun 07, 2016 11:23 am

Thanks, BigJohn and Lost Dog! I'll look into the intermediate bond fund. That mix sounds appealing to me.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

ofckrupke
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Re: Total Bond vs Intermediate Treasuries?

Post by ofckrupke » Tue Jun 07, 2016 11:46 am

Is the idea here that your TSP fraction is too small to hold all your fixed income as G fund?
Or is it that you want to keep some dry powder in taxable for some other reason...to reduce the impact of punting on tax-adjusting your allocation, or because you want a safe-ish kitty in taxable for a big (home DP?) purchase in ~5 years without much LTCG taxation, or to keep taxable rebalancing options open?

If you are still in DC and need/want to hold bonds in taxable and have the rock security of the G fund as well, then IMO nat'l muni funds are the way to go because they're double exempt in DC and you are in the top brackets. But if you are spooked by the yammering about state and local government apocalypse then just use the intermediate treasury fund you mentioned in the OP rather than the mixed intermediate bond fund, because eventually you will be spooked by yammering about some risk aspect of corporates as well. Just tell yourself that more money has been lost stretching for yield than at the point of a gun and be done with it.

disclosure: 15% long/int/limited munis in taxable, 10% TIAA Traditional, 5% Int. Inv. Grade in tax-advantaged.

Nearly A Moose
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Re: Total Bond vs Intermediate Treasuries?

Post by Nearly A Moose » Tue Jun 07, 2016 12:27 pm

ofckrupke wrote:Is the idea here that your TSP fraction is too small to hold all your fixed income as G fund?
Or is it that you want to keep some dry powder in taxable for some other reason...to reduce the impact of punting on tax-adjusting your allocation, or because you want a safe-ish kitty in taxable for a big (home DP?) purchase in ~5 years without much LTCG taxation, or to keep taxable rebalancing options open?

If you are still in DC and need/want to hold bonds in taxable and have the rock security of the G fund as well, then IMO nat'l muni funds are the way to go because they're double exempt in DC and you are in the top brackets. But if you are spooked by the yammering about state and local government apocalypse then just use the intermediate treasury fund you mentioned in the OP rather than the mixed intermediate bond fund, because eventually you will be spooked by yammering about some risk aspect of corporates as well. Just tell yourself that more money has been lost stretching for yield than at the point of a gun and be done with it.

disclosure: 15% long/int/limited munis in taxable, 10% TIAA Traditional, 5% Int. Inv. Grade in tax-advantaged.
Wow, people remember old posts! Thanks! It's a bit of everything. Spouse's TSP likely can't hold the whole fixed allocation. And I'm trying to explore the other options on the fixed income side, as I don't feel I have as good of a command there. I get that bonds are supposed to be safe, so something like G Fund is a great risk-adjusted fund, but there's also a little voice in the backing of my head saying, if TBM, Intermediate Treasuries, the Intermediate Bond Fund that was mentioned, and G Fund all more or less hold their value if stocks tank, then why shouldn't I go with the one that on average has had a higher return? Why give up a few percentage points of return that I don't need to? So that brought me to the question of how these different funds should be expected to behave.

Edit: We have a few other tax deferred accounts besides the TSP, including access to vanguard funds, so I wouldn't need to hold bonds in taxable (unless I wanted to).
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

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grap0013
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Re: Total Bond vs Intermediate Treasuries?

Post by grap0013 » Tue Jun 07, 2016 4:47 pm

Go with treasuries. They go up more than total bond when stocks go down. Just look at 2008.
There are no guarantees, only probabilities.

bargainhuntingking
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Re: Total Bond vs Intermediate Treasuries?

Post by bargainhuntingking » Tue Jun 07, 2016 5:32 pm

I split the difference and have for my fixed asset allocation 1/3 total bond index, 1/3 intermediate treasuries, and 1/3 split between a TIPS fund and an international bond fund.

I like that it overweights treasuries. It's diversified and good enough.

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Phineas J. Whoopee
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Re: Total Bond vs Intermediate Treasuries?

Post by Phineas J. Whoopee » Tue Jun 07, 2016 5:46 pm

grap0013 wrote:Go with treasuries. They go up more than total bond when stocks go down. Just look at 2008.
Though the poster may be joking, no bonds, not even treasuries, reliably go up when stocks go down.
PJW

jalbert
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Re: Total Bond vs Intermediate Treasuries?

Post by jalbert » Tue Jun 07, 2016 10:29 pm

So, what am I missing here?
Nothing. You nailed it when you said:
...with the caveat that back testing doesn't say what will happen in the future

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Whiggish Boffin
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Re: Total Bond vs Intermediate Treasuries?

Post by Whiggish Boffin » Tue Jun 07, 2016 11:56 pm

David Swensen prefers Treasuries to Total Bond.

Swensen runs the Yale endowment. He's mad that the finance industry doesn't treat common folk as respectfully as it treats his endowment. He wrote Unconventional Success for the likes of us, recommending a default portfolio for individual investors of:

30% US stock index
15% developed-world int'l stock index
5% emerging-market int'l stock index
20% real estate
15% nominal Treasury bonds
15% inflation-linked bonds

He recommends stocks for risk and growth, and bonds for safety and stability. Treasury bonds are regarded as the almost-riskless asset. He recommends against corporate bonds, because the issuers' interests are misaligned with the buyers' interests. For example, they get issued at high rates by shaky companies, and they get called when interest rates go down.

He says the duration of your Treasuries should match the market's duration. Intermediate treasuries are about there. To be persnickety you could use GOVT, the iShares all-Treasury index ETF.

I have aimed at a Swensen allocation in my 401(k). It offers Vanguard Total Bond, but no Treasury index fund. I use Total Bond there in place of Treasuries because 1) Total Bond is 69% Treasuries and 2) the difference isn't worth fretting over.

mega317
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Re: Total Bond vs Intermediate Treasuries?

Post by mega317 » Wed Jun 08, 2016 5:41 am

OT but 20% real estate!

dcabler
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Re: Total Bond vs Intermediate Treasuries?

Post by dcabler » Wed Jun 08, 2016 9:39 am

Intermediate Treasuries here for the most part. VFIUX for my Vanguard accounts and FIBAX in my Fidelity accounts. In my current company's 401K i have a total bond fund because that's all that's available.

I'm more in the "total return" camp and these funds tend to provide a nice balance when stocks go south. Total bond funds, while heavily invested in treasuries, still contain corporate bonds which are more correlated to stock returns. I also have some TIPs funds as well: VIPSX at Vanguard and FSIYX at Fidelity.

jalbert
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Re: Total Bond vs Intermediate Treasuries?

Post by jalbert » Wed Jun 08, 2016 3:41 pm

He says the duration of your Treasuries should match the market's duration. Intermediate treasuries are about there. To be persnickety you could use GOVT, the iShares all-Treasury index ETF.

I have aimed at a Swensen allocation in my 401(k). It offers Vanguard Total Bond, but no Treasury index fund. I use Total Bond there in place of Treasuries because 1) Total Bond is 69% Treasuries and 2) the difference isn't worth fretting over.
First, total bond is less than 50% treasuries. It is about 43% treasuries, 37% credit, and 20% GNMAs, which are backed by the US govt, but which Mr. Swensen intentionally excludes from his treasury recommendation, as he suggests avoiding bonds with call or prepayment options.

Second, Mr. Swensen is ambiguous in his recommendation on duration. He has recommended a market duration for bonds, but he recommends 70% stocks/REITs, 30% bonds, and recommends adding cash if more fixed income allocation is needed. This shortens duration of the fixed income allocation.

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rmelvey
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Re: Total Bond vs Intermediate Treasuries?

Post by rmelvey » Wed Jun 08, 2016 3:44 pm

Treasuries look really good historically due to the declining inflation rate. If inflation has small surprises to the upside you could see credit outperform.

Gun to my head if I had to choose only treasuries or only credit I would choose Treasuries, but I sleep better owning both through TBM!

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midareff
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Re: Total Bond vs Intermediate Treasuries?

Post by midareff » Wed Jun 08, 2016 4:14 pm

I look at things a bit differently. RMD starts for me in 2018 so that's in 2.5 years. I'd like to keep 2 to 3 years RMD in a bond fund that had excellent characteristics both in the 2008 financial crunch and the period from 6/03 through 6/06 when the Fed raised rates 17 consecutive times.
If I look at Total Bond, GNMA Fund and IT Treasuries from 6/03 through 9/09, a period which encompasses both events the GNMA Fund was the (slightly) superior performer in the interest rise period while was slightly beaten by IT Treasuries during the few month height of the flight to quality, nevertheless being superior to Total Bond again. At this point in time it is solidly ahead of both in both distributed yield and SEC per year of duration as well as on an absolute basis. It is also Fed guaranteed and is what I picked for this purpose. After holding a buffer I'll go corporate index and throw in a dollop of HY. Taxable side is IT Tax-Ex and LT Tax-Ex.

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grap0013
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Re: Total Bond vs Intermediate Treasuries?

Post by grap0013 » Wed Jun 08, 2016 6:00 pm

Phineas J. Whoopee wrote:
grap0013 wrote:Go with treasuries. They go up more than total bond when stocks go down. Just look at 2008.
Though the poster may be joking, no bonds, not even treasuries, reliably go up when stocks go down.
PJW
Nope, I'm not joking. Treasuries have basically zero correlation to equities except when equities are down big then the correlation turns negative. Flight to quality is a legitimate thing. The correlation is not static which is a good thing actually.
There are no guarantees, only probabilities.

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Phineas J. Whoopee
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Re: Total Bond vs Intermediate Treasuries?

Post by Phineas J. Whoopee » Wed Jun 08, 2016 6:26 pm

Under some circumstances they did. Other times they didn't.

You're citing one time, the recent financial crisis, when they did. Most bear markets do not coincide with liquidity crises. That one did.

Did isn't will.

It appears neither of us is joking.

PJW

stlutz
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Re: Total Bond vs Intermediate Treasuries?

Post by stlutz » Wed Jun 08, 2016 6:30 pm

Has there been a time when equities were down, Treasuries were down, but the other stuff in total bond (corporates, mortages) were up?

The reverse has certainly occurred.

jalbert
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Re: Total Bond vs Intermediate Treasuries?

Post by jalbert » Wed Jun 08, 2016 6:58 pm

When was the last time the Fed held $2.5T of treasury notes and $1.7T of mortgages on its balance sheet? Any chance that might cause things to play out differently than in recent equity downturns?

Whakamole
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Re: Total Bond vs Intermediate Treasuries?

Post by Whakamole » Wed Jun 08, 2016 7:50 pm

Phineas J. Whoopee wrote:Under some circumstances they did. Other times they didn't.

You're citing one time, the recent financial crisis, when they did. Most bear markets do not coincide with liquidity crises. That one did.

Did isn't will.

It appears neither of us is joking.

PJW
True. But this chart from Research Affiliates shows a stronger negative correlation between US Large Cap vs. US Treasuries (especially LT), than US Large Cap vs. US Core bonds.

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grap0013
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Re: Total Bond vs Intermediate Treasuries?

Post by grap0013 » Fri Jun 10, 2016 9:19 am

Phineas J. Whoopee wrote:Under some circumstances they did. Other times they didn't.

You're citing one time, the recent financial crisis, when they did. Most bear markets do not coincide with liquidity crises. That one did.

Did isn't will.

It appears neither of us is joking.

PJW
Status-post 2009. 2010 to present with a classic 60:40 equity:bond ratio. Portfolio #1 with total bond and #2 with intermediate treasuries.

https://www.portfoliovisualizer.com/bac ... TBills2=40

Portfolio 2 had higher returns, lower volatility, lower worst year, lower max drawdown, higher Sharpe and Sortino ratios. Small differences but I would take them as a gift.
There are no guarantees, only probabilities.

Boxtrap
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Re: Total Bond vs Intermediate Treasuries?

Post by Boxtrap » Wed May 16, 2018 6:16 pm

grap0013 wrote:
Fri Jun 10, 2016 9:19 am
Phineas J. Whoopee wrote:Under some circumstances they did. Other times they didn't.

You're citing one time, the recent financial crisis, when they did. Most bear markets do not coincide with liquidity crises. That one did.

Did isn't will.

It appears neither of us is joking.

PJW
Status-post 2009. 2010 to present with a classic 60:40 equity:bond ratio. Portfolio #1 with total bond and #2 with intermediate treasuries.

https://www.portfoliovisualizer.com/bac ... TBills2=40

Portfolio 2 had higher returns, lower volatility, lower worst year, lower max drawdown, higher Sharpe and Sortino ratios. Small differences but I would take them as a gift.
I’ve lookes at this exact same analysis and feel the same. Past doesn’t guarantee the future but in virtually every back test scenario I have done, VFITX had a bit better return and a bit lower volatility. Good enough for me to roll those dice and and declare intermediate treasuries my only bond holding.

aristotelian
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Re: Total Bond vs Intermediate Treasuries?

Post by aristotelian » Wed May 16, 2018 6:30 pm

OP, I agree with you. I see no reason to hold corporate bonds that are more correlated with stocks. The only reason to hold them is increased return. If I want to increase return I will increase stocks. Back testing isn't 100% but it's the best we got.

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sddiehard
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Re: Total Bond vs Intermediate Treasuries?

Post by sddiehard » Thu May 17, 2018 3:09 pm

May want to look at this paper: https://www.onefpa.org/journal/Pages/DE ... Bonds.aspx. I found it helpful with this question.

Paul

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galeno
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Re: Total Bond vs Intermediate Treasuries?

Post by galeno » Thu May 17, 2018 7:44 pm

When we held 60% equities 1.5 years ago we were happy with ONE intermediate term US treasury bond ETF.

With 40% equities I feel we need some unexpected inflation protection so we added TIPS. I also felt the need to "reach for yield" a bit so we added an investment grade corporate bond ETF to the mix.

If we ever go to 30% equities we'll "reach for yield" again and add a short term HY bond ETF.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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