[Understanding volatility in ultrashort bond funds]

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[Understanding volatility in ultrashort bond funds]

Post by b0B » Fri Nov 30, 2018 11:42 am

Ultrashort bond prices have been dropping precipitously, sometimes dramatically plunging a plural number of basis points in a single day!! :shock: Risk finally showing up? Trading halt on the way?

Okay, that's tongue in cheek, but seriously, what's behind the recent (past month or so) drop in ultrashort bond prices (not talking about ex-div days obviously)? Examples FLOT and FLRN especially, but also NEAR, MINT, GSY (while ICSH is not affected). I normally wouldn't use such things, but I went for a brokerage bonus and had to park part of the balance in these that otherwise would have sat in VMMXX.

Yes, I know the stakes are low, but it's theoretically interesting. I really don't understand what these things are.

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Re: Ultrashort bond funds in freefall

Post by Angst » Fri Nov 30, 2018 11:59 am

Maybe because short rates have been rising?

https://www.treasury.gov/resource-cente ... &year=2018

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Re: Ultrashort bond funds in freefall

Post by b0B » Fri Nov 30, 2018 12:07 pm

I don't think that's it. Timeline is wrong. These supposedly have "ultrashort" duration, though there seems to be some trick to that that I don't understand. It's (mostly) something else, but I don't know what.

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Re: Ultrashort bond funds in freefall

Post by nisiprius » Fri Nov 30, 2018 12:23 pm

I remember the Fidelity Ultrashort Bond Fund. I don't know what's in these kinds of funds, but apparently it isn't what people expected... and apparently it's really important to know.

Image

The Fidelity Ultrashort Bond Fund doesn't exist any more. Of course.

I'm not seeing any "freefall" either in the Vanguard Ultra-Short-Term Bond Fund, VUBFX (blue), nor in Morningstar's category average. I wonder why VUBFX has those stairsteps in it? (The green curve is a money market fund, but I see that if you go back more than a year, the ultrashort bond funds indeed did much better than the money market fund.)

Source

Image
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Re: Ultrashort bond funds in freefall

Post by not4me » Fri Nov 30, 2018 1:55 pm

b0B wrote:
Fri Nov 30, 2018 12:07 pm
I don't think that's it. Timeline is wrong. These supposedly have "ultrashort" duration, though there seems to be some trick to that that I don't understand. It's (mostly) something else, but I don't know what.
I'm not sure that I have the answer, but wondering which timeline you are looking at when you say 'timeline is wrong'? The 2 you highlighted are both floating rate, although I think some of the others have a good bit of floating rate. Much (most?) of floating rate are keyed to 3 month LIBOR which has substantially gone up over last 3 months. Plus, a lot of floating rate has a floor & so changes don't always show up until floor is breached -- can't say if that happened here as I haven't dug in...that's why I wonder which timeline

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Re: Ultrashort bond funds in freefall

Post by b0B » Fri Nov 30, 2018 2:00 pm

(@nisiprius) "Freefall" was hyperbole (and playing on another long thread that used that word). Nothing like that Fidelity Ultrashort Bond Fund you graphed.

But some of the funds I mentioned have shown a drop that is noteable relative to usual behavior, and not for an obvious reason (ex-div day, or generally rising rates). These things supposedly have durations a fraction of a year, while holding a lot of bonds with maturities of a few to several years. I absolutely do not understand how they do this. I wonder if whatever "trick" they use is the kind of thing that works almost always, except when it doesn't. And when it doesn't work, how badly does it not work?

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Re: Ultrashort bond funds in freefall

Post by b0B » Fri Nov 30, 2018 2:06 pm

not4me wrote:
Fri Nov 30, 2018 1:55 pm
b0B wrote:
Fri Nov 30, 2018 12:07 pm
I don't think that's it. Timeline is wrong. These supposedly have "ultrashort" duration, though there seems to be some trick to that that I don't understand. It's (mostly) something else, but I don't know what.
I'm not sure that I have the answer, but wondering which timeline you are looking at when you say 'timeline is wrong'? The 2 you highlighted are both floating rate, although I think some of the others have a good bit of floating rate. Much (most?) of floating rate are keyed to 3 month LIBOR which has substantially gone up over last 3 months. Plus, a lot of floating rate has a floor & so changes don't always show up until floor is breached -- can't say if that happened here as I haven't dug in...that's why I wonder which timeline
Re "timeline" I was thinking Fed rates have been rising 2-3 years, whereas the drop I'm talking about here is just the last month or so.

You're explanation re LIBOR sounds very plausible, though I don't know what it is so I'll look it up.

Also "changes don't always show up until floor is breached" rings true to me.

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Re: Ultrashort bond funds in freefall

Post by nisiprius » Fri Nov 30, 2018 2:38 pm

I have no idea what I'm looking at here:

FLOT Exposure Breakdowns
0 - 1 Years 15.24%
1 - 2 Years 27.55%
2 - 3 Years 33.48%
3 - 5 Years 22.35%
5 - 7 Years 0.50%
Cash and Derivatives 0.87%
So, 1/3rd of the fund's holdings have 2-3 year maturity, and if I take a weighted average and call the 2-3 year group "2.5 years," etc. I get an average maturity of 2.25 years... which, I now see, accords fairly well with what Morningstar is showing:

Image

So, all I learn from this is that I have no idea what financial engineering magic is involved in getting an 0.15-year duration out of two-year bonds.

I think anyone who buys one of these things needs to figure that out, though. Very likely Fidelity was using the wrong spells in 2008, and these funds are doing the same things but doing them right... or something.

The prospectus is clear as mud. "This mysterious fund simply reflects a mysterious underlying index."
The Fund seeks to track the investment results of the Bloomberg Barclays US Floating Rate Note < 5 Years Index (the “Underlying Index”), which measures the performance of U.S. dollar-denominated, investment-grade (as determined by Bloomberg Index Services Limited (the “Index Provider” or “Bloomberg”)) floating rate notes. Securities in the Underlying Index have a remaining maturity of greater than or equal to one month and less than five years, and have $300 million or more of outstanding face value.
Now, why would securities with maturities of 1 month to five years end up with a duration of 0.15 years?

Investopedia (I have no idea what it is, who writes it, or how reliable it is) says:
Ultra-Short Bond Fund
DEFINITION of 'Ultra-Short Bond Fund'
A type of bond fund that invests only in fixed-income instruments with very short-term maturities. An ultra-short bond fund will ideally invest in instruments with maturities around one year.
Well, this fund isn't doing that. Less than 1/6th of the fund's holdings have maturities of a year or less, and that "up to five years" isn't some kind of weaseling, 22.35% of the holdings are 3-5 years' maturity.
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Re: Ultrashort bond funds in freefall

Post by nisiprius » Fri Nov 30, 2018 2:46 pm

VUBFX, the Vanguard ultrashort bond fund looks a lot more straightforward. It has an average effective duration that's about the same as the average effective maturity...

Image

And the composition by maturity, from Vanguard's website, makes sense, too:
Under 1 Year 60.1%
1 - 3 Years 38.7%
3 - 5 Years 1.2%
5 - 7 Years 0.0%
7 - 10 Years 0.0%
10 - 20 Years 0.0%
20 - 30 Years 0.0%
Over 30 Years 0.0%
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Re: Ultrashort bond funds in freefall

Post by not4me » Fri Nov 30, 2018 3:23 pm

nisiprius wrote:
Fri Nov 30, 2018 2:38 pm
Now, why would securities with maturities of 1 month to five years end up with a duration of 0.15 years?
nisiprius, don't know if you read my previous post in this thread, but I noticed you didn't really acknowledge the distinction between the two funds you posted on in regards to one being floating rate & the other not so much (if at all?). Don't ask me how duration for floating rate is calculated, but I think that is answer to your question I highlighted...

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Re: Ultrashort bond funds in freefall

Post by cheezit » Fri Nov 30, 2018 3:26 pm

nisiprius wrote:
Fri Nov 30, 2018 2:38 pm
So, all I learn from this is that I have no idea what financial engineering magic is involved in getting an 0.15-year duration out of two-year bonds.
Could they include a bunch of instruments that are the "opposite side" so to speak of the bonds that get stripped to create zero-coupon securities?

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Re: Ultrashort bond funds in freefall

Post by b0B » Fri Nov 30, 2018 3:35 pm

(@nisiprius) I agree. VUBFX looks straightforward. But I do not understand these ultrashort bond ETFs, especially the floating rate ones. I do not understand the duration-maturity incongruity.

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Re: Ultrashort bond funds in freefall

Post by indexfundfan » Fri Nov 30, 2018 4:42 pm

Duration measures the price sensitivity of a security to interest rate changes. The higher the duration, the more sensitive it is.

For a floating rate security, if it's interest payment rises in locked step to interest rate, then technically it's sensitivity is very low or zero. This is despite the fact that it's maturity is non-zero.

At least that's how I understand it.
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Re: Ultrashort bond funds in freefall

Post by nisiprius » Fri Nov 30, 2018 5:04 pm

So an "ultrashort bond fund" made of floating rate bonds and one made of fixed rate bonds are completely different animals?
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Re: Ultrashort bond funds in freefall

Post by not4me » Fri Nov 30, 2018 5:34 pm

nisiprius wrote:
Fri Nov 30, 2018 5:04 pm
So an "ultrashort bond fund" made of floating rate bonds and one made of fixed rate bonds are completely different animals?
OP said he was going to research & I hope he will & report back and/or someone who knows more than I will give better explanation. My take is that most floating rate bonds (& many are notes) are different in several ways. They often reset the rate at a specific interval -- for this discussion say 6 months. There will be a formula such as LIBOR + 2.25%. Duration for floating rate is more tied to that interval than maturity. You have to think through what duration means, how it is calculated, etc. There is something called "credit duration" which is different, but since bonds/notes in a fund/etf will reset at different times, it will be a fraction of that interval. So, if 6 month is common & an even distribution, I'd assume then on average that would be about 45 days which is .12 of a year....To keep this from being simple, many also have a "floor" interest rate -- meaning that if the formula gives too low a rate, the rate used will be the floor

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Re: Ultrashort bond funds in freefall

Post by nisiprius » Fri Nov 30, 2018 6:15 pm

Barry Barnitz sent me a PM pointing me to this Bogleheads wiki article: Floating rate bonds

I note:
Vanguard research (August 2011) argues the following investors would benefit from including floating rate bonds in portfolios:
  • Investors who maintain highly bond-centric portfolios (80% or higher bonds).
  • Investors who are averse to pure interest rate risk.
  • Investors who are not averse to credit risk.
Arguments against including floating rate bonds in portfolio asset allocations

Vanguard research (August 2011) argues that most bond-centric investors are highly risk averse, and that exchanging interest rate risk for higher floating rate note credit risk falls outside these investors' risk tolerance. These investors would likely be better served by limiting portfolio volatility by holding short term treasury or short term investment grade bond funds.
The linked Vanguard article says:
We suggest that investors may be best served viewing these funds in a light similar to that of high-yield fixed income funds, and not as an alternative to high-credit-quality bond holdings.
Since I personally am not that highly bond-centric, am only mildly averse to interest rate risk, and am distinctly averse to credit risk, I conclude that floating rate bonds are not at all relevant to me and there's no reason for me to learn anything more about them.
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Re: Ultrashort bond funds in freefall

Post by asset_chaos » Fri Nov 30, 2018 6:42 pm

nisiprius wrote:
Fri Nov 30, 2018 5:04 pm
So an "ultrashort bond fund" made of floating rate bonds and one made of fixed rate bonds are completely different animals?
Maybe. Duration measures sensitivity to interest rate changes. Floating rate bonds can change the interest rate they pay over their lifetime. The prices of floating rate bonds don't need to change in response to general changes in interest rates because the interest rate the bond pays changes instead. As you know, the prices of fixed rate bonds change when interest rates change. Either fixed or floating are probably suited to someone's investing needs, but it's not immediately clear---at least to me---that ultrashort duration funds made from fixed or floating bonds have to be equivalent in all circumstances.

Yet another example of why we can't trust the name or category of a fund to tell us what's in the fund or how we can expect it to respond to various market conditions.
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Re: Ultrashort bond funds in freefall

Post by whodidntante » Fri Nov 30, 2018 6:46 pm

That ICSH looks pretty sweet. High credit quality, low duration, good yield, low expenses, tradeable, non-crashy (so far).

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Re: Ultrashort bond funds in freefall

Post by lack_ey » Fri Nov 30, 2018 6:59 pm

nisiprius wrote:
Fri Nov 30, 2018 5:04 pm
So an "ultrashort bond fund" made of floating rate bonds and one made of fixed rate bonds are completely different animals?
Not really. It's just that floating-rate bonds have duration much lower than maturity.

Maturity is just the time at which a floating-rate bond pays you back the principal. The interest payments are floating, resetting regularly to some short-term rate benchmark (like a LIBOR or Federal funds rate) + some spread, so term risk exposure and duration are low. After all, changes in rates shouldn't really change the price of the floating-rate bond. Do you really care if you have a floater at a rate of LIBOR + 50 bp issued 2 years ago and maturing in 2 years, vs. a floater at a rate of LIBOR + 50 bp from the same issuer maturing in 2 years? I mean, not really, I would hope.

edit: Now, keep in mind that this means an adjustment based on safe rates changing. If credit spreads widen, this can be bad news for the life of the bond (and the longer maturity could hurt). For example if a floating-rate bond is FFR + 40 bp, matures in 3 years, and credit spreads widen and similar bonds should now be FFR + 80 bp, you're losing out for a longer period of time with the floating-rate bond rather than let's say a bond with similar term risk and credit risk that matures in 3 months.


A number of ultrashort bond funds use a combination of fixed-rate and floating-rate instruments. The latter market is not huge, and investment-grade floating-rate bonds are mostly issued by banks, so I'd rather not have something that's required to be purely floaters out of considerations of diversification.


In many contexts, "floating-rate bonds" are meant for whatever reason to mean bank loans (aka senior loans aka leveraged loans), many of which are sub-investment grade. These are floating rate. These are also not what's in the floating-rate bond ETFs mentioned in the OP such as FLOT and FLRN.

For whatever reason the linked Bogleheads wiki (as well as the Vanguard paper) seems to be more about bank loans, at least when it comes to this quote:
Floating rate bonds are usually issued by companies that are below investment grade status. The average credit quality of floating rate bond funds is BB - B.
I suppose there are a number of mutual funds covering that area.


However, all of the ETFs mentioned by the OP (FLOT, FLRN, NEAR, MINT, GSY, ICSH) are 100% or substantially all in investment-grade securities. Some of the latter include things like CDs, commercial paper, even some money market stuff, in addition to just regular fixed-rate bonds about to mature, in addition to sometimes having some investment-grade floating-rate bonds.

So much of the discussion may not be that relevant to what the OP was trying to discuss.


I would mostly just say that credit spreads have been rising overall:
https://fred.stlouisfed.org/series/BAMLC0A4CBBB
Image


whodidntante wrote:
Fri Nov 30, 2018 6:46 pm
That ICSH looks pretty sweet. High credit quality, low duration, good yield, low expenses, tradeable, non-crashy (so far).
For those with say Merrill Edge (no good money market, probably free trades), it's an option. An issue is lower liquidity than many of the other funds in the space, though it has higher credit quality, lower duration, and lower expenses than most competitors.
Last edited by lack_ey on Sat Dec 01, 2018 9:35 am, edited 1 time in total.

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Re: Ultrashort bond funds in freefall

Post by b0B » Fri Nov 30, 2018 7:57 pm

Thanks. I'm learning something.

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Re: Ultrashort bond funds in freefall

Post by dumbmoney » Fri Nov 30, 2018 8:14 pm

nisiprius wrote:
Fri Nov 30, 2018 5:04 pm
So an "ultrashort bond fund" made of floating rate bonds and one made of fixed rate bonds are completely different animals?
As far as interest rate sensitivity goes, there's no difference. But a true ultra short term bond is inherently liquid, since you can just wait for it to mature. With a long term bond you have to find a willing buyer.
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Re: Ultrashort bond funds in freefall

Post by Barry Barnitz » Fri Nov 30, 2018 9:18 pm

Hi:

Note that a non-treasury floating rate bond is subject to "spread duration", which can be considerable. From the wiki:
Floating rate bonds are also subject to spread duration. [3] Basically, spread duration approximately measures the change in a floating rate bond's price with changes in credit spreads. The price movement will be approximated by multiplying the change in the yield spread times the spread duration. Thus if a floating rate bond has a spread duration of 2.0 and the credit spread widens by 100 basis points, the bond's price will decline by approximately 200 basis points.
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Re: Ultrashort bond funds in freefall

Post by Theoretical » Sat Dec 01, 2018 12:00 am

whodidntante wrote:
Fri Nov 30, 2018 6:46 pm
That ICSH looks pretty sweet. High credit quality, low duration, good yield, low expenses, tradeable, non-crashy (so far).
Yep, I like it quite a bit as well. The main thing to watch out is that it's not commission free anywhere, so you if you're using it as a cash/savings account substitute, something like Fidelity's FCONX (Conservative Income fund) or FUMBX (the short-term treasury fund) is a good place to store the regular liquidity needs.

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Re: Ultrashort bond funds in freefall

Post by whodidntante » Sat Dec 01, 2018 1:38 am

I happened across another ultrashort fund the other day, CLTL INVESCO TREASURY COLLATERAL ETF, which holds T-bills. The ER is low, 0.08%. I don't think it's ever been discussed on this site. It seems to have been created to act as collateral for Invesco's CCF funds, though I'm not sure why Invesco would want to do it that way.

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Re: Ultrashort bond funds in freefall

Post by jalbert » Sat Dec 01, 2018 2:00 am

nisiprius wrote:
Fri Nov 30, 2018 5:04 pm
So an "ultrashort bond fund" made of floating rate bonds and one made of fixed rate bonds are completely different animals?
Yes. If credit spreads widen the floating rate instrument with say a 5-year term has to discount that in over the 5-year period resulting in a significantly larger principal drop than for an ultrashort term instrument that will be cashed out in a year or less. The short duration of the floating rate instrument applies to changes to the interest rate to which the instrument is pegged, but not to changes in credit spreads.
Last edited by jalbert on Sat Dec 01, 2018 5:08 pm, edited 1 time in total.
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Re: Ultrashort bond funds in freefall

Post by lyrictulip » Sat Dec 01, 2018 8:11 am

b0B wrote:
Fri Nov 30, 2018 11:42 am
Ultrashort bond prices have been dropping precipitously, sometimes dramatically plunging a plural number of basis points in a single day!! :shock: Risk finally showing up? Trading halt on the way?
I am confused... The following is a tell tale chart, ytd, including dividends of NEAR, MINT, and ICSH. You can only see one because the lines are literally on top of each other.

Can you please point to the freefall? What am I missing?

Image

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Re: Ultrashort bond funds in freefall

Post by b0B » Sat Dec 01, 2018 9:22 am

lyrictulip wrote:
Sat Dec 01, 2018 8:11 am
Can you please point to the freefall? What am I missing?
It's hyperbole, an attempt at light humor, but still wanting to seriously discuss the phenomenon. I'm learning something.

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Re: Ultrashort bond funds in freefall

Post by lyrictulip » Sat Dec 01, 2018 9:27 am

:oops:
b0B wrote:
Sat Dec 01, 2018 9:22 am
lyrictulip wrote:
Sat Dec 01, 2018 8:11 am
Can you please point to the freefall? What am I missing?
It's hyperbole, an attempt at light humor, but still wanting to seriously discuss the phenomenon. I'm learning something.

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Re: Ultrashort bond funds in freefall

Post by indexfundfan » Sat Dec 01, 2018 9:29 am

I sometimes use MINT or JPST in the Merrill Edge tax-deferred accounts to hold cash. In the past two weeks or so, I did notice that the steady NAV increases stopped for MINT.

I intend to switch to SHV or BIL in the future instead.
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Re: Ultrashort bond funds in freefall

Post by b0B » Sat Dec 01, 2018 9:49 am

lyrictulip wrote:
Sat Dec 01, 2018 9:27 am
:oops:
b0B wrote:
Sat Dec 01, 2018 9:22 am
lyrictulip wrote:
Sat Dec 01, 2018 8:11 am
Can you please point to the freefall? What am I missing?
It's hyperbole, an attempt at light humor, but still wanting to seriously discuss the phenomenon. I'm learning something.
Your point and graph are totally valid. These are low risk stable investments (though not that Fidelity one nisiprius posted earlier). BUT they're not quite as safe and stable as me and others may have thought.

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Re: Ultrashort bond funds in freefall

Post by lack_ey » Sat Dec 01, 2018 10:05 am

b0B wrote:
Sat Dec 01, 2018 9:49 am
Your point and graph are totally valid. These are low risk stable investments (though not that Fidelity one nisiprius posted earlier). BUT they're not quite as safe and stable as me and others may have thought.
We've seen pretty stable times, not huge jumps in rates or credit spreads as of late. We haven't really seen the risk show up, so to speak (as let's say a 5 percentile or worse outcome). It can get a lot bumpier.

Over roughly this period, credit spreads stayed about the same, and this is some fund performance:
Image
NEAR - iShares Short Maturity Bond ETF
VFMXX - Vanguard Federal Money Market Fund
MINT - PIMCO Enhanced Short Maturity Active ETF
FLOT - iShares Floating Rate Bond ETF

Defaults and downgrades activity could be much more prevalent at times, and over a given period credit spreads can widen (and hurt performance over that period, if rapid enough).

But over a normal period like this, investors had a pretty decent time, I would say, for what it does and the risk.

Hopefully it's understood that there's some real risk here, even in the investment-grade space. That's what comes with the higher yield.

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Re: Ultrashort bond funds in freefall

Post by Valuethinker » Sat Dec 01, 2018 10:40 am

nisiprius wrote:
Fri Nov 30, 2018 2:38 pm
I have no idea what I'm looking at here:

FLOT Exposure Breakdowns
0 - 1 Years 15.24%
1 - 2 Years 27.55%
2 - 3 Years 33.48%
3 - 5 Years 22.35%
5 - 7 Years 0.50%
Cash and Derivatives 0.87%
So, 1/3rd of the fund's holdings have 2-3 year maturity, and if I take a weighted average and call the 2-3 year group "2.5 years," etc. I get an average maturity of 2.25 years... which, I now see, accords fairly well with what Morningstar is showing:

Image

So, all I learn from this is that I have no idea what financial engineering magic is involved in getting an 0.15-year duration out of two-year bonds.

I think anyone who buys one of these things needs to figure that out, though. Very likely Fidelity was using the wrong spells in 2008, and these funds are doing the same things but doing them right... or something.

The prospectus is clear as mud. "This mysterious fund simply reflects a mysterious underlying index."
The Fund seeks to track the investment results of the Bloomberg Barclays US Floating Rate Note < 5 Years Index (the “Underlying Index”), which measures the performance of U.S. dollar-denominated, investment-grade (as determined by Bloomberg Index Services Limited (the “Index Provider” or “Bloomberg”)) floating rate notes. Securities in the Underlying Index have a remaining maturity of greater than or equal to one month and less than five years, and have $300 million or more of outstanding face value.
Now, why would securities with maturities of 1 month to five years end up with a duration of 0.15 years?

Investopedia (I have no idea what it is, who writes it, or how reliable it is) says:
Ultra-Short Bond Fund
DEFINITION of 'Ultra-Short Bond Fund'
A type of bond fund that invests only in fixed-income instruments with very short-term maturities. An ultra-short bond fund will ideally invest in instruments with maturities around one year.
Well, this fund isn't doing that. Less than 1/6th of the fund's holdings have maturities of a year or less, and that "up to five years" isn't some kind of weaseling, 22.35% of the holdings are 3-5 years' maturity.
Floating Rate Notes have very short duration because they are equivalent to money market instruments.

I think it is a quirk of the way duration is calculated

Modified duration measures sensitivity to a tiny change in interest rates of the price of a bond. For a FRN the interest rate changes so the bond price immediately rests to close to par

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Re: Ultrashort bond funds in freefall

Post by jeffyscott » Sat Dec 01, 2018 11:09 am

Valuethinker wrote:
Sat Dec 01, 2018 10:40 am
Floating Rate Notes have very short duration because they are equivalent to money market instruments.
I think floating rate funds tend to have lower rated bonds in them, unlike money markets. But ultrashort bond funds can be money market-ish.

For example T. Rowe floating rate (PRFRX) has
BB at 26%
B at 55%
and Below B at 9%

and these figures are in line with category average, according to M*.

On the other hand their ultrashort fund (TRBUX) has less than 7% rated BB or unrated and this is also similar to category average, so it is mostly investment grade.

This discussion seems to be mixing up these two much different type of funds. One is like a short duration, high yield bond fund, the other is like a long duration money market-like fund or just a very short term bond fund (particularly in the case of the Vanguard version, VUSFX, which has 85% of holdings rated A or above).
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Re: Ultrashort bond funds in freefall

Post by not4me » Sat Dec 01, 2018 11:45 am

lack_ey wrote:
Sat Dec 01, 2018 10:05 am

Defaults and downgrades activity could be much more prevalent at times, and over a given period credit spreads can widen (and hurt performance over that period, if rapid enough).

But over a normal period like this, investors had a pretty decent time, I would say, for what it does and the risk.

Hopefully it's understood that there's some real risk here, even in the investment-grade space. That's what comes with the higher yield.
To add onto the point about credit spreads...that is true for a given bond issuer as well as which issuers participate in the market.

Also, the widening of spreads, of course, reflects worsening credit. Specifically regarding the floating rate issues that use LIBOR in determining the rate, do you think the recent changes in LIBOR is affected by worsening credit? the fed actions? Both? something else? The last 3 months the 3 month LIBOR has changed in what I would say is an "unusual" amount (admittedly, I'm not an expert & could be proven wrong of that characterization...). Maybe a canary that can't sing for the coughing?

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Re: Ultrashort bond funds in freefall

Post by Doc » Sat Dec 01, 2018 11:47 am

lack_ey wrote:
Sat Dec 01, 2018 10:05 am
We've seen pretty stable times, not huge jumps in rates or credit spreads as of late. We haven't really seen the risk show up, so to speak (as let's say a 5 percentile or worse outcome). It can get a lot bumpie
Not sure what your graph purports to show but here's a price chart with the Vg Ultra Short fund VUBFX added:

Image
http://quotes.morningstar.com/chart/fun ... ture=en_US

Image

Seems to me the freefall is not everywhere.
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Re: Ultrashort bond funds in freefall

Post by bobcat2 » Sat Dec 01, 2018 12:02 pm

nisiprius wrote:
Fri Nov 30, 2018 2:46 pm
VUBFX, the Vanguard ultrashort bond fund ... . It has an average effective duration that's about the same as the average effective maturity...

Image


I'm curious. How does VUBFX have duration longer than maturity?

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Re: Ultrashort bond funds in freefall

Post by Doc » Sat Dec 01, 2018 12:53 pm

bobcat2 wrote:
Sat Dec 01, 2018 12:02 pm
nisiprius wrote:
Fri Nov 30, 2018 2:46 pm
VUBFX, the Vanguard ultrashort bond fund ... . It has an average effective duration that's about the same as the average effective maturity...

Image


I'm curious. How does VUBFX have duration longer than maturity?

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I think it's a derivative thingy. But I don't really care about a few days difference.
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Re: Ultrashort bond funds in freefall

Post by jalbert » Sat Dec 01, 2018 5:31 pm

There was a flurry of creating new ultrashort bond funds in response to money-market interest rates being at or within a basis point or two of zero for a long time. The idea was to have a very short duration, less than one, and take credit risk to actually earn a little bit of interest. The short maturities mean that the credit risk is primarily limited to actual defaults because credit spreads rising and/or liquidity falling for a bond can be dealt with easily by holding the bond to maturity for the short remaining period, so that the effect on NAV of interest rates or credit spreads increasing would be well controlled but not non-existent.

If you think about floating rate instruments from the perspective of the issuer, it clarifies that floating rate credit is unlikely to be of high credit quality. The corporate issuer would prefer to issue fixed rate bonds to lock in the low prevailing interest rates. Floating rate instruments would only be issued by companies insufficiently creditworthy to issue fixed rate instruments at attractive rates.

Floating rate credit also has more liquidity risk than duration-matched fixed-term credit because the longer maturities provide less liquidity from bonds maturing.
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Re: Ultrashort bond funds in freefall

Post by libralibra » Sat Dec 01, 2018 6:38 pm

b0B wrote:
Sat Dec 01, 2018 9:22 am
lyrictulip wrote:
Sat Dec 01, 2018 8:11 am
Can you please point to the freefall? What am I missing?
It's hyperbole, an attempt at light humor, but still wanting to seriously discuss the phenomenon. I'm learning something.
Not a fan of click-bait titles. Maybe an admin would be willing to augment it.

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Re: Ultrashort bond funds in freefall

Post by b0B » Sat Dec 01, 2018 6:57 pm

libralibra wrote:
Sat Dec 01, 2018 6:38 pm
b0B wrote:
Sat Dec 01, 2018 9:22 am
lyrictulip wrote:
Sat Dec 01, 2018 8:11 am
Can you please point to the freefall? What am I missing?
It's hyperbole, an attempt at light humor, but still wanting to seriously discuss the phenomenon. I'm learning something.
Not a fan of click-bait titles. Maybe an admin would be willing to augment it.
It is a play on the title of a huge thread from 2011 (but ongoing)
"U.S. stocks in freefall"
viewtopic.php?f=10&t=80065
It is worth examining other asset classes and what may be behind unusually large drops relative to what's normal or expected for that asset class.

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Re: Ultrashort bond funds in freefall

Post by libralibra » Sat Dec 01, 2018 8:09 pm

I'll admit I've noticed the ex-div low get lower each month. Looks like a 23c div this time, so the price could drop below 101.20? Down from 101.56 at the start of the year. (for MINT, that is)

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Re: Ultrashort bond funds in freefall

Post by 2015 » Sun Dec 02, 2018 2:32 pm

b0B wrote:
Sat Dec 01, 2018 6:57 pm
libralibra wrote:
Sat Dec 01, 2018 6:38 pm
b0B wrote:
Sat Dec 01, 2018 9:22 am
lyrictulip wrote:
Sat Dec 01, 2018 8:11 am
Can you please point to the freefall? What am I missing?
It's hyperbole, an attempt at light humor, but still wanting to seriously discuss the phenomenon. I'm learning something.
Not a fan of click-bait titles. Maybe an admin would be willing to augment it.
It is a play on the title of a huge thread from 2011 (but ongoing)
"U.S. stocks in freefall"
viewtopic.php?f=10&t=80065
It is worth examining other asset classes and what may be behind unusually large drops relative to what's normal or expected for that asset class.
Is it? How is such an "examination" "worth" it? And what exactly is "normal" or "expected", aside from the narrative fallacy such concepts are based on?

I've learned something. Like the stuff they sell in Starbucks display cases, asset class pastries with opaque and complex filling disappoint when actually consumed. Ok, I didn't just learn this. I already knew it, simply based on history.

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Re: Ultrashort bond funds in freefall

Post by Scooter57 » Sun Dec 02, 2018 3:11 pm

My guess is that funds that saw a dramatic price drop in the recent past held a lot of GE bonds. There are a lot of them out there and they lost a great deal of value after GE's last report. Vanguard had a bunch of their "investment grade" bonds yielding around 7% on Friday, which tells you their price has tanked. They may be technically "investment grade" but they are trading like junk.

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Re: Ultrashort bond funds in freefall

Post by triceratop » Sun Dec 02, 2018 5:16 pm

nisiprius wrote:
Fri Nov 30, 2018 6:15 pm
Since I personally am not that highly bond-centric, am only mildly averse to interest rate risk, and am distinctly averse to credit risk, I conclude that floating rate bonds are not at all relevant to me and there's no reason for me to learn anything more about them.
As mentioned in the Bogleheads wiki article, the U.S. Treasury sells Treasury FRNs, more information available on TreasuryDirect. They have done so since 2014. The at-issue maturity is 2 years but the interest payments rise and fall based on the discount rate demanded by the market for the 13-week (3-month) bill. We see then that even absent the higher yields demanded as compensation for credit risk, which then pushes duration lower than maturity, it is still possible for maturity to be vastly different than duration.

Vanguard's paper predates the existence of Treasury FRNs. If you want to be really technical about this, the Treasury FRNs are not "bonds" so their arguments are still correct even in a modern context, but can be misleading.
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Re: Ultrashort bond funds in freefall

Post by LadyGeek » Sun Dec 02, 2018 6:47 pm

b0B wrote:
Sat Dec 01, 2018 9:22 am
lyrictulip wrote:
Sat Dec 01, 2018 8:11 am
Can you please point to the freefall? What am I missing?
It's hyperbole, an attempt at light humor, but still wanting to seriously discuss the phenomenon. I'm learning something.
FYI - It's very difficult to convey humor in this forum. I retitled the thread for clarity.
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Re: [Understanding volatility in ultrashort bond funds]

Post by b0B » Mon Dec 03, 2018 11:13 am

The "normal" price graph of these ultrashort bond funds is a sawtooth shape as accrued dividends build up during the month, then drop back down on ex-div day (at least for funds where dividends accrue in the price, which is most of them). You have to subtract out this effect to see price movement from other causes.

Anyway it appears that in a month, ETFs like FLOT and FLRN have dropped about 50bp, while ETFs like NEAR and MINT have dropped about 20bp. Obviously that's not volatile like stocks, but they're not cash either.

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Re: [Understanding volatility in ultrashort bond funds]

Post by nisiprius » Mon Dec 03, 2018 1:50 pm

b0B, I don't know whether floating rate bond funds are customarily included in lists of "ultrashort bond funds." Since you've been looking at them, from the thread title and initial reference to FLOT and FLRN, I gather that they are. If I've learned anything at all from this thread, it seems to me that one thing I've learned is that they shouldn't be. That is to say, funds with ultrashort durations because of ultrashort maturities are not at all the same thing as funds that hold bonds with 3-year maturities, and have ultrashort durations because the bonds themselves have floating rates and thus ultrashort durations.

Now, can someone remind me just what it was that the Fidelity ultrashort bond fund was holding in 2008?
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Re: [Understanding volatility in ultrashort bond funds]

Post by Barry Barnitz » Mon Dec 03, 2018 2:20 pm

nisiprius wrote:
Mon Dec 03, 2018 1:50 pm
b0B, I don't know whether floating rate bond funds are customarily included in lists of "ultrashort bond funds." Since you've been looking at them, from the thread title and initial reference to FLOT and FLRN, I gather that they are. If I've learned anything at all from this thread, it seems to me that one thing I've learned is that they shouldn't be. That is to say, funds with ultrashort durations because of ultrashort maturities are not at all the same thing as funds that hold bonds with 3-year maturities, and have ultrashort durations because the bonds themselves have floating rates and thus ultrashort durations.

Now, can someone remind me just what it was that the Fidelity ultrashort bond fund was holding in 2008?

Hi Nisi:

Not exactly what you are looking for, but note that the Vanguard Treasury Money Market fund invests in Treasury Floating Rate Notes as well as Treasury Bills. This can be verified in the N-Q report.

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Re: [Understanding volatility in ultrashort bond funds]

Post by lm » Wed Dec 05, 2018 4:06 am

nisiprius wrote:
Mon Dec 03, 2018 1:50 pm
Now, can someone remind me just what it was that the Fidelity ultrashort bond fund was holding in 2008?
From https://www.kiplinger.com/article/inves ... -safe.html:
So why has the fund lost close to 10% of its value since July? Co-manager Andrew Dudley, an experienced hand who has a good record on other Fidelity bond funds going back to the 1990s, pleads "sizable exposure to subprime mortgage securities" and the fund's slowness to get out of them.

Clearly, triple-A isn't what you think or Andy Dudley thinks it used to be. And maybe a simpler fund is better. The annual report needs 45 pages to list the investments in what was, as of July 31, a $1 billion fund (and is now down to $730 million). The holdings included credit-default swaps, total-return swaps, floating-rate mortgage securities, structured this and collateralized that. Some of these, such as credit-card receivables, are recognizable and relatively clear-cut. Most of them aren't.

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Re: [Understanding volatility in ultrashort bond funds]

Post by b0B » Wed Dec 05, 2018 10:46 pm

FLOT and FLRN price have dropped a full 1% in a month, which seems a lot for ultrashort bond funds (albeit the floating rate variety). But I just looked at M*, and it says that the Prem/Discount of these went from about zero to -67bp in one and -51bp in the other, so a gap has opened there. So the question is, which one is the real value, the price or the NAV?

Obviously volatility in the 1.x% I have in ultrashort bonds is peanuts compared to the volatility in the >80% I have in stocks. But I'm totally used to how stocks have been behaving, whereas these ultrashort bonds seem weird to me and I really don't understand them (although the explanations here help).

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