Rate hikes vs - Muni, Corp, Total Bond funds

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ps56k
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Rate hikes vs - Muni, Corp, Total Bond funds

Post by ps56k » Thu Jun 14, 2018 1:00 am

With the recent rate hike, and more anticipated,
how does that affect the Vanguard bond funds - such as the Intermediate Muni, LT Investment Grade, or Total US Bond

I can see how some of these types might be directly impacted by rising rates - but what about the Vanguard Intermediate Muni fund

AlohaJoe
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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by AlohaJoe » Thu Jun 14, 2018 1:04 am

How did all the past rate hikes over the past 3+ years affect those? The Fed has been raising rates since February 2015. It is pretty easy to check how they've done over the past 3 years.

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by Bob » Thu Jun 14, 2018 7:11 am

Great question that I have wondered about, too. So I collected recent data to look at it. It covers the last 18 months and not 3 years since I could not find Muni Fund data before 2016 easily. For the table below, the Federal Funds data is from FRED and the Intermediate Muni data (for VWIUX Admiral shares) is from the Vanguard website.

I cannot cut & paste my data or chart from Excel into this editor to in an easy-to-view way so the data column labels from left to right for the table below are:

1st column = Date (which is Record date and not Payable date)
2nd column = Effective Federal Funds Rate (per FRED)
3rd column = VWIUX Distribution Yield (for that month)
4th column = VWIUX Price as of the date

5/31/2018 1.70 2.86 $13.91
4/30/2018 1.69 2.91 $13.80
3/29/2018 1.51 2.88 $13.88
2/28/2018 1.42 2.87 $13.88
1/31/2018 1.41 2.84 $13.95
12/29/2017 1.30 2.83 $14.13
11/30/2017 1.16 2.80 $14.04
10/31/2017 1.15 2.77 $14.17
9/29/2017 1.15 2.76 $14.19
8/31/2017 1.16 2.77 $14.28
7/31/2017 1.15 2.80 $14.20
6/30/2017 1.04 2.81 $14.14
5/31/2017 0.91 2.84 $14.22
4/28/2017 0.90 2.87 $14.06
3/31/2017 0.79 2.87 $13.99
2/28/2017 0.66 2.87 $13.98
1/31/2017 0.65 2.88 $13.93
12/30/2016 0.54 2.92 $13.89

My own observations (so far) are that while the Federal Funds Rate has more than tripled in the last year and a half it has only gone up about 1.15 points to 1.70%. So while it is up it is a long way from the 5.25% level that it was in 2006. As for the impact on VWIUX Distribution Yield and Price, those have gone up and down in the last year and a half but they are not hugely different now compared to December 2016.

So far, then, it makes me feel like "staying the course" with my own VWIUX holdings during this period has not been a bad decision that I regret. But since past does not predict the future, I'm not sure how this might play out in the future.

Anyway, here is some data ;) Hope other might add to this...

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by Admiral » Thu Jun 14, 2018 7:17 am

As long as the average term matches your investing horizon, the fluctuations are immaterial to you. In general, as prices fall, yields rise. As prices rise, yields fall.

Total Bond is medium term fund, I think it's like 6 or 7 year average duration to maturity.

It's only a problem if you are forced to sell when yields are rising, which means prices are lower and you cannot capture the new, higher payouts. In this case, you could face a (slight) loss, unless we're talking very big numbers.

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by Sylarr » Thu Jun 14, 2018 7:36 am

Bob wrote:
Thu Jun 14, 2018 7:11 am

Code: Select all

5/31/2018	1.70	 2.86 	$13.91 
4/30/2018	1.69	 2.91 	$13.80 
3/29/2018	1.51	 2.88 	$13.88 
2/28/2018	1.42	 2.87 	$13.88 
1/31/2018	1.41	 2.84 	$13.95 
12/29/2017	1.30	 2.83 	$14.13 
11/30/2017	1.16	 2.80 	$14.04 
10/31/2017	1.15	 2.77 	$14.17 
9/29/2017	1.15	 2.76 	$14.19 
8/31/2017	1.16	 2.77 	$14.28 
7/31/2017	1.15	 2.80 	$14.20 
6/30/2017	1.04	 2.81 	$14.14 
5/31/2017	0.91	 2.84 	$14.22 
4/28/2017	0.90	 2.87 	$14.06 
3/31/2017	0.79	 2.87 	$13.99 
2/28/2017	0.66	 2.87 	$13.98 
1/31/2017	0.65	 2.88 	$13.93 
12/30/2016	0.54	 2.92 	$13.89
[code] works for this.

Bob
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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by Bob » Thu Jun 14, 2018 9:05 am

Graph of the data.

Image

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by Bob » Thu Jun 14, 2018 3:34 pm

Sylarr,
Thanks for the"code". I need to get better at adding tables and graphics. Good to keep learning. ;)
Bob

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ps56k
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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by ps56k » Thu Jun 14, 2018 3:40 pm

Bob wrote:
Thu Jun 14, 2018 9:05 am
Graph of the data.
Thanks for taking the time and effort to collect, tabulate, and chart...

Bob
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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by Bob » Thu Jun 14, 2018 3:53 pm

ps56k,
Thanks for asking the question!
It triggered me finally looking at this. It was something I should have looked into myself earlier.
Bob

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by venkman » Thu Jun 14, 2018 9:54 pm

ps56k wrote:
Thu Jun 14, 2018 1:00 am
With the recent rate hike, and more anticipated,
how does that affect the Vanguard bond funds - such as the Intermediate Muni, LT Investment Grade, or Total US Bond
I can see how some of these types might be directly impacted by rising rates - but what about the Vanguard Intermediate Muni fund
I think the Vanguard muni funds buy a lot of premium bonds, which tend to be somewhat less affected by rising rates. The higher coupons help keep the duration lower.

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by grabiner » Fri Jun 15, 2018 10:36 pm

Bob wrote:
Thu Jun 14, 2018 7:11 am
My own observations (so far) are that while the Federal Funds Rate has more than tripled in the last year and a half it has only gone up about 1.15 points to 1.70%. So while it is up it is a long way from the 5.25% level that it was in 2006. As for the impact on VWIUX Distribution Yield and Price, those have gone up and down in the last year and a half but they are not hugely different now compared to December 2016.
The distribution yield is not the right number to use here. If a $1000 bond with a ten-year duration falls in price to $900, this implies that its yield-to-maturity went up by 1%; that is the yield used in computing SEC yields. But if the bond previously had a 3% yield, that means it distributed $30 per year, and the distribution yield went up only to 3.33%.

Conversely, the distribution yield of a bond fund can change even when interest rates do not change. Suppose that after this happens, the fund sells the bond (for a $100 capital loss), and buys a new bond for $900 with a 4% yield and $900 value at maturity. The distribution will change from $30 to $36, and thus the distribution yield rose to 4%.
Wiki David Grabiner

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by Bob » Sat Jun 16, 2018 7:00 am

Grabiner,
Thank you for your good point and explanation. What would you recommend is the best way to look at a bond fund like VWIUX (Intermediate Muni) over time in light of the changing Federal Funds Rate?
Bob

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by Admiral » Sat Jun 16, 2018 7:09 am

Bob wrote:
Sat Jun 16, 2018 7:00 am
Grabiner,
Thank you for your good point and explanation. What would you recommend is the best way to look at a bond fund like VWIUX (Intermediate Muni) over time in light of the changing Federal Funds Rate?
Bob
If you would have bought it a year ago when it was $14.21, why would you not buy it now when it is $13.87? With a higher yield? :confused

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ps56k
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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by ps56k » Sat Jun 16, 2018 12:42 pm

I was curious about the comparisons, for my simple understanding of how and which "bonds" might be influenced by rates...

Muni - issued by municipalities, and fixed for their period - rates set by issuing municipality - competing for investors when rates change
LT Corp Investment - issued by companies for capex projects - might be affected by rising rates, costs more for capex projects
Tot Bond - mostly treasury with a dash of others to juggle the implied risk vs yield -

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by grabiner » Sat Jun 16, 2018 8:34 pm

Bob wrote:
Sat Jun 16, 2018 7:00 am
Thank you for your good point and explanation. What would you recommend is the best way to look at a bond fund like VWIUX (Intermediate Muni) over time in light of the changing Federal Funds Rate?
Look at the SEC yield of the fund, and at the yield on Treasuries of similar duration to see the relevant bond market trend. If a fund holds five-year bonds, it isn't affected directly by changes in short-term rates such as the Federal Funds rate; it is affected by investors' expectations about interest rates over the next five years. For example, if investors already expect the Federal Funds rate to rise 1% over the next year, longer-term bond yields will include that expectation, and will not change when the rises happen as expected.
Wiki David Grabiner

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by ps56k » Sat Aug 11, 2018 9:20 am

tnx for the chart and data...

It will be interesting, for those comparing bond yields in their portfolios,
to see how the creeping long terms compare to the somewhat flat muni yields.
For those in the muni world, guessing in the higher tax brackets,
at what point does the tax advantage muni fade compared to the higher long term yield ?
What would be the new breakeven 2018 IRS tax brackets point for the tipping point ?

10% - $19k
12% - $77k
22% - $165k
24% - $315k
32% - $400k
35% - $600k
37% - $600k+

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by skeptical » Sat Aug 11, 2018 9:53 am

Starting dates make a big difference. VWIUX was at 14.61 just a couple months before the data in these charts, which means there was a 5% drop over the course of a couple of months just before this data, and these charts would look a lot different if this was included. I know, since this is when I put a lot of money into VWIUX that summer.

No regrets, in it for the long term, and if I include interest, I am up (tax free) 1.2% since then, which over two years of rising interest rates is not bad, especially as compared to cash or short term treasuries.

Unfortunately, the monthly distributions have not changed (I thought they would go up), but the sec yield went from 1.83% to 2.38%. These changes in NAV (lower), dividends (unchanged) , and yields (better SEC yield) are due to the difference in SEC yield (1.83%) vs distribution yield (almost 3%) when I got into this fund.

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by grabiner » Sun Aug 12, 2018 12:49 pm

skeptical wrote:
Sat Aug 11, 2018 9:53 am
Starting dates make a big difference. VWIUX was at 14.61 just a couple months before the data in these charts, which means there was a 5% drop over the course of a couple of months just before this data, and these charts would look a lot different if this was included. I know, since this is when I put a lot of money into VWIUX that summer.
How much of this was a capital gain? (I can't figure out how to get historical capital gains on either Vanguard's or Morningstar's website.)
Unfortunately, the monthly distributions have not changed (I thought they would go up), but the sec yield went from 1.83% to 2.38%. These changes in NAV (lower), dividends (unchanged) , and yields (better SEC yield) are due to the difference in SEC yield (1.83%) vs distribution yield (almost 3%) when I got into this fund.
For a fund with a five-year duration, that should result in a price decline of 2.75%, not 5%; this is why I expect there may be a capital gain as part of the price decline.

It will take longer for distributions to increase, as the distribution yield changes only when the fund buys new bonds. If a bond was issued for $1000 with a 3% yield, the bond will distribute $30 per year; this is a 3% distribution yield, and rises to only 3.33% if the bond price falls to $900. But if the reason that the bond price fell to $900 is that rates rose to 5%, the fund will eventually sell this bond (or it will mature) and buy a new bond with a 5% distribution yield.
Wiki David Grabiner

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Re: Rate hikes vs - Muni, Corp, Total Bond funds

Post by skeptical » Wed Sep 12, 2018 5:06 pm

sorry for late reply, I am not usually logged in and don;t know when there is a post.

There have been no or at least very minimal cap gains in VWIUX, all I know is the nav has reduced from 14.61 to 13.82, a little over 5%.

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