SEC yield vs YTD bond fund

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S_Track
Posts: 167
Joined: Sat Feb 18, 2017 12:33 pm

SEC yield vs YTD bond fund

Post by S_Track » Tue Jul 10, 2018 9:58 pm

Hi All,

Having trouble understanding Sec yield vs YTD when looking at bond funds on VG’s site. I understand how the NAV drops when Dividends are paid and reinvesting the dividends compensates for the loss with more shares. Where I get confused is when reading posts where members ask about investing for the short term. Many replies suggest looking at the current sec yield of say Short-Term Investment-Grade which currently has a sec yield of 3.07. That sounds good but that really does not compare to say a savings account giving 3.07 percent interest (if one existed)? The YTD for Short-term investment grade is -.29%. Portfolio Visualizer shows a total return loss when looking at Jan to June of this year even with dividends reinvested. If I were making 3.07% in a saving account I would not have the loss. Some how I am missing something when thinking of the importance of the sec yield.

Thanks Bob

zmaqoptyxbglp
Posts: 110
Joined: Wed May 16, 2018 10:17 pm

Re: SEC yield vs YTD bond fund

Post by zmaqoptyxbglp » Tue Jul 10, 2018 10:07 pm

If the interest rates and market expectation of future interest rates stay constant, then yes, the SEC yield will be comparable to a savings account offering the same rate.

A major reason the SEC yield might overstate bond fund return is that the NAV will fall as interest rates go up, or market expectation of future interest rates go up. This is called interest rate risk of bonds.

So if you had a bond fund with NAV $100, that initially had an SEC yield of 5%, you would get $5 this year in interest payments/dividends. But if interest rates went up, your NAV might fall to $94 to make the bond attractive at contemporary market prices, since the bond will still only pay $5. So you'd have a negative total return in this case.

What has happened in the past several months is that interest rates have gone up, and the market expects the central bank to raise rates further. So the NAV has dropped as a result. Feel free to ask more questions if this is unclear.

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patrick013
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Joined: Mon Jul 13, 2015 7:49 pm

Re: SEC yield vs YTD bond fund

Post by patrick013 » Tue Jul 10, 2018 10:16 pm

Read about duration. The bond fund has some NAV decrease
due to rising rates. The fund will receive the SEC yield at
the duration term approximately and compound a little more
due to rising rates for reinvestment. But the NAV will fluctuate
until the rates become more constant.

A bank account or CD will get 2 or 3 percent or whatever rate
but no fluctuation. You just hold those till maturity usually in
a laddered investment. Each ladder receives it's own rate and
maturity.
age in bonds, buy-and-hold, 10 year business cycle

S_Track
Posts: 167
Joined: Sat Feb 18, 2017 12:33 pm

Re: SEC yield vs YTD bond fund

Post by S_Track » Tue Jul 10, 2018 10:19 pm

zmaqoptyxbglp wrote:
Tue Jul 10, 2018 10:07 pm
If the interest rates and market expectation of future interest rates stay constant, then yes, the SEC yield will be comparable to a savings account offering the same rate.

A major reason the SEC yield might overstate bond fund return is that the NAV will fall as interest rates go up, or market expectation of future interest rates go up. This is called interest rate risk of bonds.

So if you had a bond fund with NAV $100, that initially had an SEC yield of 5%, you would get $5 this year in interest payments/dividends. But if interest rates went up, your NAV might fall to $94 to make the bond attractive at contemporary market prices, since the bond will still only pay $5. So you'd have a negative total return in this case.

What has happened in the past several months is that interest rates have gone up, and the market expects the central bank to raise rates further. So the NAV has dropped as a result. Feel free to ask more questions if this is unclear.
Thanks for the detailed explanation.

Beensabu
Posts: 175
Joined: Sun Aug 14, 2016 3:22 pm

Re: SEC yield vs YTD bond fund

Post by Beensabu » Tue Jul 10, 2018 11:36 pm

You may find the posts by PJW in this thread to be helpful.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."

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