Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Fri Jan 11, 2019 5:53 pm

I guess that Vanguard's active bond fund managers are simply boosting income by buying premium bonds, while keeping true to their target benchmark on a total return basis.

I wouldn't be surprised to learn that active bond fund investors have a preference for higher income. This would match the behavior of income investors.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

dcabler
Posts: 1138
Joined: Wed Feb 19, 2014 11:30 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by dcabler » Sat Jan 12, 2019 7:39 am

siamond wrote:
Fri Jan 11, 2019 5:36 pm
I ran a few more tests and swapped a couple of messages with longinvest.

The bottomline is that Vanguard treasury bonds which are NOT index funds (e.g. VUSTX, VFITX, VFISX) seem to be more active than I would have expected, and their price series have a life of their own... It seems that they end up with similar total returns using rather different means than indices (or corresponding index funds). Trouble is we have less than a decade of returns for true bond index funds (e.g. VLGSX, VSIGX, VSBSX), so it isn't terribly significant to check the simulator's numbers against such limited reality. And corresponding indices (for IT/ST treasuries) do not have a PR (price-only) data series available in Morningstar.

I don't know what else to do to run a solid sanity check about the new income/capital breakdown from the simulator. I'd be inclined to just trust longinvest and call it a day...
It's not much help, but Fido's series give you a couple of extra years as these go back to early Jan 2008.
FUAMX (ITT) don't use the search feature in Morningstar. This is one of the funds that changed names recently and M* hasn't completely updated things. However, if pull up another fund and just change the URL to FUAMX, then you get the info)
FNBGX (LTT)
FXNAX (STT)

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sat Jan 12, 2019 1:02 pm

dcabler wrote:
Sat Jan 12, 2019 7:39 am
It's not much help, but Fido's series give you a couple of extra years as these go back to early Jan 2008.
Interesting idea! I looked at treasury index funds from Fidelity (e.g. FUMBX, FUAMX, FNBGX), they were created in 2005, so yes, we get more history. I started to check FUAMX (the IT fund), the total-returns match the corresponding index quite well, but... the price series started by the end of 2017, aarg. Which we can more directly observe by checking the price chart on Morningstar. Same for the other funds.

This loss of history is probably a side effect of the ongoing merging of asset classes. I am stuck again, hmpf.

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sat Jan 12, 2019 6:09 pm

After some detective work (using 'time machine' copies of Morningstar Web pages!), I was able to reconstruct the data series for the Fidelity index funds. I used:
* FLBAX - Fidelity Spartan Long-Term Treasury Bond Index Fund
* FIBAX - Fidelity Spartan Intermediate-Term Treasury Bond Index Fund

Both funds share class was 'Advantage' (ER = 0.07), they were created by the end of 2005 and closed early Nov-18. Which means that I couldn't reconstruct the 2018 returns for those funds, so I used instead the newer 'class-less' Fidelity funds for 2018 (FNBGX and FUAMX).

I compared to the corresponding Vanguard index funds (inception end of 2009), which have the same ER (0.07):
* VLGSX - Vanguard Long-Term Treasury Index Fund (Admiral)
* VSIGX - Vanguard Intermediate-Term Treasury Index Fund (Admiral)

To fill the blanks and ease the comparison, I equated the (capital and total) returns of the Vanguard funds to Fidelity for 2006-2009. Then I compared to the index data series from Barclays ("/X" notation, PR/TR for LTT, TR only for ITT -PR missing-). And compared to the capital and total returns from longinvest's latest model ("/M" notation). And assembled the followed growth charts. I hope I didn't mess up with the inputs... Click on the image to see larger charts.

There is a lot going on in those charts... My bottomline is that it seems more satisfying for total-returns than for prices, but when we see the price variations between Fidelity and Vanguard index funds, the price model might actually be fairly ok. That is, for those few years where we can compare to actuals.

EDIT: shoot, the Intermediate-Term comparison isn't valid... Fidelity FIBAX/FUAMX follows Barclays U.S. 5-10 Year Treasuries (the ITT index I used in the charts below) while Vanguard VSIGX follows Barclays U.S. 3-10 Year Treasuries. Missed that... :(

Image

Image

dcabler
Posts: 1138
Joined: Wed Feb 19, 2014 11:30 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by dcabler » Sun Jan 13, 2019 6:40 am

siamond wrote:
Sat Jan 12, 2019 6:09 pm
After some detective work (using 'time machine' copies of Morningstar Web pages!), I was able to reconstruct the data series for the Fidelity index funds. I used:
* FLBAX - Fidelity Spartan Long-Term Treasury Bond Index Fund
* FIBAX - Fidelity Spartan Intermediate-Term Treasury Bond Index Fund

Both funds share class was 'Advantage' (ER = 0.07), they were created by the end of 2005 and closed early Nov-18. Which means that I couldn't reconstruct the 2018 returns for those funds, so I used instead the newer 'class-less' Fidelity funds for 2018 (FNBGX and FUAMX).

I compared to the corresponding Vanguard index funds (inception end of 2009), which have the same ER (0.07):
* VLGSX - Vanguard Long-Term Treasury Index Fund (Admiral)
* VSIGX - Vanguard Intermediate-Term Treasury Index Fund (Admiral)

To fill the blanks and ease the comparison, I equated the (capital and total) returns of the Vanguard funds to Fidelity for 2006-2009. Then I compared to the index data series from Barclays ("/X" notation, PR/TR for LTT, TR only for ITT -PR missing-). And compared to the capital and total returns from longinvest's latest model ("/M" notation). And assembled the followed growth charts. I hope I didn't mess up with the inputs... Click on the image to see larger charts.

There is a lot going on in those charts... My bottomline is that it seems more satisfying for total-returns than for prices, but when we see the price variations between Fidelity and Vanguard index funds, the price model might actually be fairly ok. That is, for those few years where we can compare to actuals.

EDIT: shoot, the Intermediate-Term comparison isn't valid... Fidelity FIBAX/FUAMX follows Barclays U.S. 5-10 Year Treasuries (the ITT index I used in the charts below) while Vanguard VSIGX follows Barclays U.S. 3-10 Year Treasuries. Missed that... :(

Image


Image

Isn't the total return data from longinvest's spreadsheet originally calibrated (or at least compared) to the somewhat-active versions of Vanguard's bond funds, not their newer passive counterparts? Not sure how much difference trying to change that would make when trying to compare to either the Vanguard or Fido series, but maybe something to consider if you're just trying to check the methodology.

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Sun Jan 13, 2019 9:51 am

dcabler wrote:
Sun Jan 13, 2019 6:40 am
Isn't the total return data from longinvest's spreadsheet originally calibrated (or at least compared) to the somewhat-active versions of Vanguard's bond funds, not their newer passive counterparts?
The total return data in the simulator spreadsheet is directly derived by simulating ladder-like* bond funds using available historical yields (Shiller, NBER, and FRED), as described in the first post of this thread, without any calibration whatsoever.

* With the exception of the "EqPar Zero fund (30 to 21-year)" which is equal-par weighted.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sun Jan 13, 2019 10:45 am

dcabler wrote:
Sun Jan 13, 2019 6:40 am
Isn't the total return data from longinvest's spreadsheet originally calibrated (or at least compared) to the somewhat-active versions of Vanguard's bond funds, not their newer passive counterparts? Not sure how much difference trying to change that would make when trying to compare to either the Vanguard or Fido series, but maybe something to consider if you're just trying to check the methodology.
There is a calibration of sorts to the indices followed by the Vanguard funds, e.g. the funds being currently modeled match the range of (treasury) maturities used by the index of relevance. For long-term bonds, both Vanguard and Fidelity follow the same index and the bond fund 30-11 model is comparable. Now, as we discovered, the active flavor of the Vanguard seems to do a fairly good job of tracking total returns of its index, while its price trajectory displayed a life of their own... While the passive flavor of both Vanguard and Fidelity got closer to the price trajectory of the index.

My silly mistake yesterday was to assume that the same was true for intermediate-term bonds, but as I discovered afterwards, Vanguard and Fidelity made different choices of IT index. Which means that the 10-4 bond fund model (calibrated for the index Vanguard follows) wasn't relevant for the comparison with Fidelity. Making my IT comparison charts basically meaningless. Oh well, I tried. :|

dcabler
Posts: 1138
Joined: Wed Feb 19, 2014 11:30 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by dcabler » Sun Jan 13, 2019 10:45 am

longinvest wrote:
Sun Jan 13, 2019 9:51 am
dcabler wrote:
Sun Jan 13, 2019 6:40 am
Isn't the total return data from longinvest's spreadsheet originally calibrated (or at least compared) to the somewhat-active versions of Vanguard's bond funds, not their newer passive counterparts?
The total return data in the simulator spreadsheet is directly derived by simulating ladder-like* bond funds using available historical yields (Shiller, NBER, and FRED), as described in the first post of this thread, without any calibration whatsoever.

* With the exception of the "EqPar Zero fund (30 to 21-year)" which is equal-par weighted.
OK, but they were compared as I see when I go back through the this thread. Maybe the question is really for siamond. At some point earlier in the thread, siamond picked up on longinvest's work to use the returns generated from your spreadsheet as a proxy for the various vanguard funds in the simba spreadsheet before their actual inception date. At some point in the 2016 timeframe, it was determined that the 10-4 model was a decent substitute for the index that VFITX more or less follows...

So if the purpose is to just compare the methodology for generating price returns vs. reality, and if the Fido data goes back the farthrest, is the 10-4 model close enough, or should there be a modification to the spreadsheet to add something that better approximates the Barclays index that Fido uses?
Second, but related question, is whether Simba should switch over to the pure index funds instead of the managed ones (sorry - off topic)

dcabler
Posts: 1138
Joined: Wed Feb 19, 2014 11:30 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by dcabler » Sun Jan 13, 2019 10:49 am

siamond wrote:
Sun Jan 13, 2019 10:45 am
dcabler wrote:
Sun Jan 13, 2019 6:40 am
Isn't the total return data from longinvest's spreadsheet originally calibrated (or at least compared) to the somewhat-active versions of Vanguard's bond funds, not their newer passive counterparts? Not sure how much difference trying to change that would make when trying to compare to either the Vanguard or Fido series, but maybe something to consider if you're just trying to check the methodology.
There is a calibration of sorts to the indices followed by the Vanguard funds, e.g. the funds being currently modeled match the range of (treasury) maturities used by the index of relevance. For long-term bonds, both Vanguard and Fidelity follow the same index and the bond fund 30-11 model is comparable. Now, as we discovered, the active flavor of the Vanguard seems to do a fairly good job of tracking total returns of its index, while its price trajectory displayed a life of their own... While the passive flavor of both Vanguard and Fidelity got closer to the price trajectory of the index.

My silly mistake yesterday was to assume that the same was true for intermediate-term bonds, but as I discovered afterwards, Vanguard and Fidelity made different choices of IT index. Which means that the 10-4 bond fund model (calibrated for the index Vanguard follows) wasn't relevant for the comparison with Fidelity. Making my IT comparison charts basically meaningless. Oh well, I tried. :|
Yep, that's what I recalled and what I saw when I went back to the earlier postings in this thread.

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sun Jan 13, 2019 11:00 am

dcabler wrote:
Sun Jan 13, 2019 10:45 am
So if the purpose is to just compare the methodology for generating price returns vs. reality, and if the Fido data goes back the farthrest, is the 10-4 model close enough, or should there be a modification to the spreadsheet to add something that better approximates the Barclays index that Fido uses?
Well, yes, I could ask longinvest to add a 10-6 model which would match better the index followed by the Fidelity IT fund. But given that Fidelity only adds a few years of real-life record, it is really not worth the effort.
dcabler wrote:
Sun Jan 13, 2019 10:45 am
Second, but related question, is whether Simba should switch over to the pure index funds instead of the managed ones (sorry - off topic)
Yes, this is a legitimate question. I am not too hot about making a spliced series with years of active fund (e.g. VUSTX) followed by more recent years of passive fund (e.g. VLGSX). What we could do is to switch to a series splicing the bond model of relevance, then the index until 2009, then the corresponding passive fund. Such series would undoubtedly be more consistent. We would lose more than 20 years of real-life history though. Plus, I wonder how many Bogleheads actually use those truly passive bond funds as opposed to the more well-known active funds. Feedback welcome, it is clearly a valid question, but I am not too sure such a change would be worth it.

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Sun Jan 13, 2019 11:08 am

siamond wrote:
Sun Jan 13, 2019 11:00 am
Well, yes, I could ask longinvest to add a 10-6 model which would match better the index followed by the Fidelity IT fund. But given that Fidelity only adds a few years of real-life record, it is really not worth the effort.
It would be quite easy, actually, to add a 10-6 model. Want me to do it?

Self-correction would extend as far as the 10-4 model, as FRED provides both 3 and 5 year constant maturity yields since 1954.
Last edited by longinvest on Sun Jan 13, 2019 11:22 am, edited 2 times in total.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

dcabler
Posts: 1138
Joined: Wed Feb 19, 2014 11:30 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by dcabler » Sun Jan 13, 2019 11:13 am

siamond wrote:
Sun Jan 13, 2019 11:00 am
dcabler wrote:
Sun Jan 13, 2019 10:45 am
So if the purpose is to just compare the methodology for generating price returns vs. reality, and if the Fido data goes back the farthrest, is the 10-4 model close enough, or should there be a modification to the spreadsheet to add something that better approximates the Barclays index that Fido uses?
Well, yes, I could ask longinvest to add a 10-6 model which would match better the index followed by the Fidelity IT fund. But given that Fidelity only adds a few years of real-life record, it is really not worth the effort.
dcabler wrote:
Sun Jan 13, 2019 10:45 am
Second, but related question, is whether Simba should switch over to the pure index funds instead of the managed ones (sorry - off topic)
Yes, this is a legitimate question. I am not too hot about making a spliced series with years of active fund (e.g. VUSTX) followed by more recent years of passive fund (e.g. VLGSX). What we could do is to switch to a series splicing the bond model of relevance, then the index until 2009, then the corresponding passive fund. Such series would undoubtedly be more consistent. We would lose more than 20 years of real-life history though. Plus, I wonder how many Bogleheads actually use those truly passive bond funds as opposed to the more well-known active funds. Feedback welcome, it is clearly a valid question, but I am not too sure such a change would be worth it.
Thanks siamond - I'll move the discussion on the bond funds over to the Simba thread and put the question there.

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sun Jan 13, 2019 11:21 am

longinvest wrote:
Sun Jan 13, 2019 11:08 am
siamond wrote:
Sun Jan 13, 2019 11:00 am
Well, yes, I could ask longinvest to add a 10-6 model which would match better the index followed by the Fidelity IT fund. But given that Fidelity only adds a few years of real-life record, it is really not worth the effort.
It would be quite easy, actually, to add a 10-6 model. Want me to do it?
For the sake of trying to further validating the capital return (price) model, I really don't think it's worth adding it (note that M* doesn't provide PR series for IT indices, neither of them). Now, for the sake of having a reference to extend the history of the Fidelity IT fund, this might present *some* value? Not that I have any plan to add such a data series to Simba, but maybe one day, we'll find a good reason to use it, e.g. to help compare 10-5 to 10-3 index strategies and help some investors to choose between Vanguard and Fidelity funds. Up to you, but my motivation is rather low, quite frankly!

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Sun Jan 13, 2019 12:03 pm

I have uploaded version 1.21 of the Bond Fund Simulator spreadsheet.

It is available online and to download from the links in the first post.

Main changes:
  • Added Bond Fund (10 to 6-year).
As usual, comments are welcome.

Enjoy!
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Sun Jan 13, 2019 11:58 pm

I have uploaded version 1.22 of the Bond Fund Simulator spreadsheet.

It is available online and to download from the links in the first post.

Main changes:
  • Added Bond Fund (5 to 2-year).
As usual, comments are welcome.

Enjoy!
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Tue Jan 15, 2019 11:14 am

Longinvest has been steadily adding new bond fund models to the simulator. It seems to me that it would be a good time to develop some generic set of rules as well as specific recommendations when trying to best match a given real-life bond fund to a given model. Case in point, the main bond funds from Vanguard and Fidelity. Let me start by a few which are top of mind for the Simba backtesting spreadsheet.

Vanguard Total Bond Market Index Fund (VBTLX/VBMFX):
- passive index fund, mix of treasuries, government and corporates
- benchmark: Bloomberg Barclays U.S. Aggregate Bond Index
- current average maturity: 8.4 years
- current maturity distribution is wide, including a good deal of (~40%) of bonds maturing in 5 years or less

Vanguard Short-Term Treasury Index Fund (VSBSX):
- passive index fund, treasuries only
- benchmark: Bloomberg Barclays U.S. Treasury 1-3 Year Index
- current average maturity: 2.0 years
- current maturity distribution is entirely made of of bonds maturing in 3 years or less
(the corresponding Fidelity index fund, FUMBX, is anchored on a 1-5 yrs index, confusing!)

Vanguard Intermediate-Term Treasury Index Fund (VSIGX):
- passive index fund, treasuries only
- benchmark: Bloomberg Barclays U.S. Treasury 3-10 Year Index
- current average maturity: 5.6 years
- current maturity distribution is ~50% 3-5 years and ~50% 5-10 years
(the corresponding Fidelity index fund, FUAMX, is anchored on a 5-10 yrs index, confusing!)

Vanguard Long-Term Treasury Index Fund (VLGSX):
- passive index fund, treasuries only
- benchmark: Bloomberg Barclays U.S. Long Treasury Index
- current average maturity: 25.1 years
- current maturity distribution is very skewed towards very long term (93% 20-30 yrs; 7% 10-20 yrs)
(the corresponding Fidelity index fund, FNBGX, is mercifully anchored on the same index)

Vanguard Short-Term Treasury Fund (VFISX/VFIRX):
- active fund, treasuries only
- benchmark: Bloomberg Barclays U.S. 1-5 Year Treasury Bond Index
- current average maturity: 2.2 years
- current maturity distribution is 90% made of of bonds maturing in 3 years or less
(NOT the same benchmark as VSBSX although current characteristics are quite similar, confusing!)

Vanguard Intermediate-Term Treasury Fund (VFITX/VFIUX):
- active fund, treasuries only
- benchmark: Bloomberg Barclays U.S. 5-10 Year Treasury Bond Index
- current average maturity: 6.0 years
- current maturity distribution is ~40% 3-5 years and ~60% 5-10 years
(NOT the same benchmark as VSIGX although current characteristics are somewhat similar, confusing!)

Vanguard Long-Term Treasury Fund (VUSTX/VUSUX):
- active fund, treasuries only
- benchmark: Bloomberg Barclays U.S. Long Treasury Bond
- current average maturity: 24.8 years
- current maturity distribution is very skewed towards very long term (91% 20-30 yrs; also includes a few % of short-term maturities)
(mercifully close to its index companion fund, VLGSX, except for the few short-term bonds)

Feedback welcome from bond experts...
Last edited by siamond on Sat Jan 19, 2019 12:06 pm, edited 1 time in total.

User avatar
Kevin M
Posts: 11252
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by Kevin M » Tue Jan 15, 2019 12:20 pm

It would seem that an index fund is going to be easier to match with a model. By definition, the makeup of an actively-managed bond fund is going to change over time in an unpredictable way, so it would seem that it would be more difficult to model.

A few years ago, I compared the holdings of the VG intermediate-term Treasury fund (not the index fund) at a few different points in time, and the distribution of maturities was quite different at different times.

Nevertheless, I believe it's been shown that the appropriate longinvest model does a decent job of matching the performance (total return) of the corresponding actively-managed Vanguard bond fund. My understanding is that Vanguard actively-managed bond funds are relatively passive compared to some other actively-managed bond funds; i.e., they don't make really big bets that deviate too much from the benchmark.

Sorry I don't have anything more concrete to offer.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

dcabler
Posts: 1138
Joined: Wed Feb 19, 2014 11:30 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by dcabler » Tue Jan 15, 2019 3:46 pm

Kevin M wrote:
Tue Jan 15, 2019 12:20 pm
It would seem that an index fund is going to be easier to match with a model. By definition, the makeup of an actively-managed bond fund is going to change over time in an unpredictable way, so it would seem that it would be more difficult to model.

A few years ago, I compared the holdings of the VG intermediate-term Treasury fund (not the index fund) at a few different points in time, and the distribution of maturities was quite different at different times.

Nevertheless, I believe it's been shown that the appropriate longinvest model does a decent job of matching the performance (total return) of the corresponding actively-managed Vanguard bond fund. My understanding is that Vanguard actively-managed bond funds are relatively passive compared to some other actively-managed bond funds; i.e., they don't make really big bets that deviate too much from the benchmark.

Sorry I don't have anything more concrete to offer.

Kevin
I've noticed that, too, even with index bond funds. Any idea why? It would seem that an index bond fund isn't a perfect conveyor belt. I tried to find construction rules some time ago but couldn't.

kolea
Posts: 1322
Joined: Fri Jul 11, 2014 5:30 pm
Location: Maui and Columbia River Gorge

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by kolea » Tue Jan 15, 2019 5:23 pm

dcabler wrote:
Tue Jan 15, 2019 3:46 pm
Kevin M wrote:
Tue Jan 15, 2019 12:20 pm
It would seem that an index fund is going to be easier to match with a model. By definition, the makeup of an actively-managed bond fund is going to change over time in an unpredictable way, so it would seem that it would be more difficult to model.

A few years ago, I compared the holdings of the VG intermediate-term Treasury fund (not the index fund) at a few different points in time, and the distribution of maturities was quite different at different times.

Nevertheless, I believe it's been shown that the appropriate longinvest model does a decent job of matching the performance (total return) of the corresponding actively-managed Vanguard bond fund. My understanding is that Vanguard actively-managed bond funds are relatively passive compared to some other actively-managed bond funds; i.e., they don't make really big bets that deviate too much from the benchmark.

Sorry I don't have anything more concrete to offer.

Kevin
I've noticed that, too, even with index bond funds. Any idea why? It would seem that an index bond fund isn't a perfect conveyor belt. I tried to find construction rules some time ago but couldn't.
The Barclay US Aggregate index is silent on how maturities are distributed. It is more specific on the distribution of quality and source of the securities. Maturity distribution can have a huge effect on how a fund performs. For instance, BND, the Vanguard fund, is a barbell, with a bit of weight out at longer maturities. They do this to juice the returns. But that is a lot of latitude for a bond fund manager and it really blurs the distinction between an active fund and a passive fund.

I have also been quite interested in simulating a bond fund and wrote a simulator in Java. As this thread discusses, it became quite obvious to me that the key to getting the fund to be at all accurate is to have the full historical yield curve. For me, I am less interested in simulating a specific bond fund and more interested in seeing how a bond fund behaves when things change, for instance what happens as the yield curve steepens or flattens? Stuff like that. But I also use my simulator as input to a RIP tool I wrote and it would be nice to at least have the slope of the yield curve between the 1-year and 10-year points, as a function of time. But the full yield curve, going back to 1926 or so, would be great!
Kolea (pron. ko-lay-uh). Golden plover.

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Wed Jan 16, 2019 6:17 pm

siamond wrote:
Tue Jan 15, 2019 11:14 am
It seems to me that it would be a good time to develop some generic set of rules as well as specific recommendations when trying to best match a given real-life bond fund to a given model.
I suggest to keep things simple:

1- Treasury index funds: match the fund to the model that contains the same maturities.

Example: Vanguard Long-Term Treasury Index Fund Admiral Shares (VLGSX) "invests in debt issued by the U.S. Treasury (not including inflation-protected bonds) and U.S. government agencies, as well as corporate or dollar-denominated foreign debt guaranteed by the U.S. government, with maturities greater than 10 years". As a consequence, I would choose the model that includes all bonds with a maturity equal or higher than 10 years. This would be Bond Fund (30 to 11-year), because the 11-year bond is kept for one year and sold when it reaches 10 years to maturity.

2- Total Bond Market index fund: match the fund to the Bond Fund (10 to 2-year) model. Various reasons:
  • The total bond market contains a wide variety of bonds: corporates, Treasuries, Government mortgage-backed, etc. These bonds cover all maturities above 1 year. Yet, the weighting of short-term bonds is high. As a result, the average duration of the total bond market is 6 years. It's half a year longer than the 5.5 year average duration of Bond Fund (10 to 2 year). But, the wide variety of bonds it contains gives it a smoother behavior than implied by its duration. We've seen this in 2008-2009, when corporates dampened the volatility of Treasuries, making the total market quite smooth. By using a model based on default-less Treasuries with a slightly shorter duration, the volatility is likely to be somewhat similar.
  • To my eye, when looking visually at a logarithmic growth chart of Vanguard's Total Bond Market Index Fund (VBMFX) since inception and of Bond Fund (10 to 2-year), they seem to share a relatively similar volatility. Bund Fund 10-2 is somewhat more volatile (e.g. in 2008-2009), but it's similar enough. They also share close-enough returns. It's not perfect, but I don't see an obviously better match among the models.
  • The total bond market can be considered as a good default bond fund, for an investor, today. Such a fund didn't exist in 1871, but it would be reasonable to assume that a bond investor of the time would have maintained a bond ladder. Maybe a super sophisticated investor would have sold his bond one year prior to maturity, as the Bond Fund (10 to 2-year) model does.
  • Bond Fund (10 to 2-year) is the only "fund" model with self-correcting returns going back to 1871. There's also Bond Ladder (10 to 1-year), but it's a "ladder", not a "fund". (I use "fund" when bonds aren't held until maturity). Other fund models are also simulated back to 1871, but they only gain the self-correcting property in later years.
3- Treasury funds (not indexed): when necessary, because of a lack of an index fund, use the model covering the same maturities as the fund.

4- Other Bond funds: don't match to a model.

One annoying issue that remains is to decide what is:
  • Short-term: is it 1 to 3, or 1 to 5 years?
  • Intermediate-term: is it 3 to 10, or 5 to 10 years?
  • Long-term: I think that most funds define this as 10 years or more.
My personal preference would be 1 to 5 years for short term and, correspondingly, 5 to 10 years for intermediate term. I find 1 to 3 years too narrow (only 2 rungs in the fund model). This choice would result into the following matches:
  • Short-term Treasury index: Bond Fund (5 to 2-year)
  • Intermediate-term Treasury index: Bond Fund (10 to 6-year)
  • Long-term Treasury index: Bond Fund (30 to 11-year)
This would also imply a preference for using the historical returns of Fidelity's short-term and intermediate-term index funds FUMBX and FUAMX.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

User avatar
Kevin M
Posts: 11252
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by Kevin M » Wed Jan 16, 2019 8:11 pm

longinvest wrote:
Wed Jan 16, 2019 6:17 pm
My personal preference would be 1 to 5 years for short term and, correspondingly, 5 to 10 years for intermediate term. I find 1 to 3 years too narrow (only 2 rungs in the fund model). This choice would result into the following matches:
  • Short-term Treasury index: Bond Fund (5 to 2-year)
  • Intermediate-term Treasury index: Bond Fund (10 to 6-year)
  • Long-term Treasury index: Bond Fund (30 to 11-year)
This would also imply a preference for using the historical returns of Fidelity's short-term and intermediate-term index funds FUMBX and FUAMX.
Most of what you said makes sense on a quick read, but not so sure about this bit. On a forum called "Bogleheads", which is a descendant of a forum called "Vanguard Diehards", I would think we'd prefer the Vangaurd funds over the Fidelity funds. This also is more consistent with what Simba always has done, and I what Portfolio Visualizer does (use Vanguard funds when data available).

The VG short-term Treasury index fund holds bonds in the 1-3 year range, with an average maturity of two years. The intermediate-term fund holds bonds mostly in the 3-10 year range, with an average maturity of 5.6 years. Long-term Treasury holds 93% in 20-30 year range, with average maturity of about 25 years.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Wed Jan 16, 2019 8:45 pm

OK, it makes sense to stick with Vanguard's definitions*.

* Interestingly, Vanguard Canada defines short-term bonds (VSG) as as 1 to 5 years. Go figure!

How about the following?
  • Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX):
    • "This low-cost index fund invests in debt issued by the U.S. Treasury (not including inflation-protected bonds) and U.S. government agencies, as well as corporate or dollar-denominated foreign debt guaranteed by the U.S. government, all with maturities between 1 and 3 years." (source)
    • Matching model: Bond Fund (3 to 2-year)
  • Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX):
    • "This low-cost index fund invests in debt issued by the U.S. Treasury (not including inflation-protected bonds) and U.S. government agencies, as well as corporate or dollar-denominated foreign debt guaranteed by the U.S. government, with maturities between 3 and 10 years." (source)
    • Matching model: Bond Fund (10 to 4-year)
  • Vanguard Long-Term Treasury Index Fund Admiral Shares (VLGSX):
    • "This low-cost index fund invests in debt issued by the U.S. Treasury (not including inflation-protected bonds) and U.S. government agencies, as well as corporate or dollar-denominated foreign debt guaranteed by the U.S. government, with maturities greater than 10 years." (source)
    • Matching model: Bond Fund (30 to 11-year)
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Thu Jan 17, 2019 1:24 pm

Understood and agreed about the various treasury index funds. Thanks, this is exactly the kind of guidelines that I was aiming at.

I share the feeling that Vanguard's approach to index IT/ST funds is a little weird, but it is what it is...
longinvest wrote:
Wed Jan 16, 2019 6:17 pm
3- Treasury funds (not indexed): when necessary, because of a lack of an index fund, use the model covering the same maturities as the fund.
Could you please elaborate, taking the example of the three active (and long lived) Vanguard funds I identified in this post (which are being tracked in Simba)?

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Thu Jan 17, 2019 6:23 pm

siamond wrote:
Thu Jan 17, 2019 1:24 pm
Could you please elaborate, taking the example of the three active (and long lived) Vanguard funds I identified in this post (which are being tracked in Simba)?
Sure. For active Treasury funds, I would use their benchmark as guide:

siamond wrote:
Tue Jan 15, 2019 11:14 am
Vanguard Short-Term Treasury Fund (VFISX/VFIRX):
- active fund, treasuries only
- benchmark: Bloomberg Barclays U.S. 1-5 Year Treasury Bond Index
Given the Bloomberg Barclays U.S. 1-5 Year Treasury Bond Index* benchmark, I would match it to Bond Fund (5 to 2-year).

* Includes U.S. Treasury obligations with maturities of 1 to 5 years.

siamond wrote:
Tue Jan 15, 2019 11:14 am
Vanguard Intermediate-Term Treasury Fund (VFITX/VFIUX):
- active fund, treasuries only
- benchmark: Bloomberg Barclays U.S. 5-10 Year Treasury Bond Index
Given the Bloomberg Barclays U.S. 5-10 Year Treasury Bond Index* benchmark, I would match it to Bond Fund (10 to 6-year).

* Includes U.S. Treasury obligations with maturities of 5 to 10 years.

siamond wrote:
Tue Jan 15, 2019 11:14 am
Vanguard Long-Term Treasury Fund (VUXTX/VUSUX):
- active fund, treasuries only
- benchmark: Bloomberg Barclays U.S. Long Treasury Bond
Given the Bloomberg Barclays U.S. Long Treasury Bond* benchmark, I would match it to Bond Fund (30 to 11-year).

* Includes U.S. Treasury obligations with remaining maturities of 10+ years.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sat Jan 19, 2019 1:05 pm

longinvest wrote:
Thu Jan 17, 2019 6:23 pm
siamond wrote:
Thu Jan 17, 2019 1:24 pm
Could you please elaborate, taking the example of the three active (and long lived) Vanguard funds I identified in this post (which are being tracked in Simba)?
Sure. For active Treasury funds, I would use their benchmark as guide [...]
I skimmed through the discussion about those active funds in the first few pages of this thread. By then, the reasoning seemed much more centered on (current) average maturity and distribution of maturities. Which led us, as a case in point, to map VFITX to the 10-4 model (while the benchmark would suggest 10-6). And fact is the 10-4 model maps fairly well with the actuals for the known years.

Now Kevin warned us several times that such current average maturity has been changing over time - those funds being active after all. Reading those discussions in light of the way Vanguard settled on 3-10 years maturity for its intermediate-term index fund, I started to wonder if the managers of the corresponding active fund started with a thinking clearly anchored on 5-10yrs (the benchmark), THEN evolved over time towards 3-10yrs - without updating their benchmark. And when time came to create a true index fund, they launched VSIGX based on a 3-10yrs index. Then same story for short-term bonds, evolving from 1-5yrs to 1-3yrs.

Using my usual bag of tricks to retrieve historical data, I actually found data series tracking the current average maturity for those treasury funds over time (I also found current average duration and maturity breakdown, by the way). And I assembled a little graph, including trend lines.

Image

I wouldn't assert that my hypothesis is definitely correct, but let's say it remains credible. Now about those long-term bonds, that is quite the trajectory, for which I have no interpretation.

Finally, I assembled the same chart for the much more short-lived index funds. I don't have much of a commentary here, we just don't have enough history.

Image

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Sat Jan 19, 2019 2:07 pm

I would keep things simple. If you want to extend Treasury index fund historical returns with approximations back until 1871, I would go with the index fund returns when available, then use a close-enough active fund's returns for missing years, when available, and finally patch the rest with the index fund's matching model. Here's an example:

Short-Term Treasury Index Fund:
  • Fund (3 to 2-year) from 1871 until inception of VFISX
  • Vanguard Short-Term Treasury Fund (VFISX/VFIRX) from inception until inception of VSBSX
  • Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX) from inception and thereafter
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

User avatar
Kevin M
Posts: 11252
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by Kevin M » Sat Jan 19, 2019 2:43 pm

siamond wrote:
Sat Jan 19, 2019 1:05 pm
Using my usual bag of tricks to retrieve historical data, I actually found data series tracking the current average maturity for those treasury funds over time (I also found current average duration and maturity breakdown, by the way). And I assembled a little graph, including trend lines.
Whether or not it's useful for the bond fund simulator, I find this very interesting, and potentially useful when doing historical analysis of the funds.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sat Jan 19, 2019 2:56 pm

longinvest wrote:
Sat Jan 19, 2019 2:07 pm
I would keep things simple. If you want to extend Treasury index fund historical returns with approximations back until 1871, I would go with the index fund returns when available, then use a close-enough active fund's returns for missing years, when available, and finally patch the rest with the index fund's matching model. Here's an example:

Short-Term Treasury Index Fund:
  • Fund (3 to 2-year) from 1871 until inception of VFISX
  • Vanguard Short-Term Treasury Fund (VFISX/VFIRX) from inception until inception of VSBSX
  • Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX) from inception and thereafter
Yes, I am starting to warm up to this approach (I think this is what dcabler suggested to start with, actually). I was not comfortable with the benchmark discrepancy between the active and the index funds, but it appears from the "avg maturity" charts I posted that there is pretty good continuity after all.

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sat Mar 02, 2019 9:42 am

Let me archive this very useful post from AlohaJoe on this thread, so that we can easily find it again... Note that this is a 30-20 model.
AlohaJoe wrote:
Mon Feb 11, 2019 2:54 am
Per siamond's request, here is a simulated "long term Treasury" bond fund with monthly returns:

https://docs.google.com/spreadsheets/d/ ... sp=sharing

It goes back to 1871 for reasons -- but really you should only look at the 1953-onwards data, since that's when GS20 + GS30 started being published. A quick spot check show the returns are broadly similar (but not identical) with what VUSUX (Vanguard Long-Term Treasury) has seen in the past few years.

The methodology is based on longinvest's "from rates to returns" -- viewtopic.php?t=179425 -- but extended to work on a monthly, rather than annual, basis.

The rates used are from FRED: GS1, GS2, GS3, GS5, GS7, GS10, GS20, GS30.

The interpolated yield curve is a simple linear interpolation, not any of the fancy methods that central banks use, e.g. https://www.federalreserve.gov/pubs/fed ... 628pap.pdf

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Fri Jul 12, 2019 7:55 am

I've been asked how to calculate the yield to maturity (YTM) of a simulated bond fund. I'm replying on the forum as this could benefit other readers.

I'll illustrate how to do this using the Bond Fund (10 to 2-year) simulation:

Image

At the start of each year, this ladder-like bond fund is composed of 9 bonds with maturities of 10, 9, 8, ..., and 2 years. The YTM of each of the 10 bonds is simply the "Rate" of its maturity (e.g. the 10-year rate for the 10-year bond) which can be found in the grey columns:

Image

The YTM of the bond fund is an average of the YTMs of the 9 bonds, weighted by the value of each bond.

The bond fund is organized in 9 rungs. Each rung contains a bond which decreases in maturity each year and is replaced by a new 10-year bond when maturity falls to 1 year.

Calculating the weighted average YTM of the bond fund is a simple arithmetic operation. Let's pick 2019 as an example.

The 9 rungs are composed as follows in 2019:
Image
  • Rung 1: maturity 6 years, value $50,291.19, YTM 2.55%
  • Rung 2: maturity 7 years, value $51,180.23, YTM 2.59%
  • Rung 3: maturity 8 years, value $52,779.22, YTM 2.62%
  • Rung 4: maturity 9 years, value $53,911.67, YTM 2.66%
  • Rung 5: maturity 10 years, value $56,369.75, YTM 2.69%
  • Rung 6: maturity 2 years, value $47,699.39, YTM 2.48%
  • Rung 7: maturity 3 years, value $47,637.11, YTM 2.46%
  • Rung 8: maturity 4 years, value $48,193.56, YTM 2.49%
  • Rung 9: maturity 5 years, value $51,047.86, YTM 2.51%
The total value of the fund is $459,109.99.

The weighted-average YTM of Bond Fund (10 to 2-year) in 2019 is equal to:

(($50,291.19 / $459,109.99) X 2.55%) + ... + (($51,047.86 / $459,109.99) X 2.51%) = 2.57%
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sun Aug 25, 2019 11:08 am

Two (really small) things I noticed...
1. the title of this thread could benefit from removing the reference to Shiller since other sources for rates are used (e.g. FRED, NBER)
2. would be cool if all tabs in the spreadsheet would start the modeled returns on the same row (e.g. row 7 instead of either row 6 or row 7)

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Sun Aug 25, 2019 11:37 am

siamond wrote:
Sun Aug 25, 2019 11:08 am
Two (really small) things I noticed...
1. the title of this thread could benefit from removing the reference to Shiller since other sources for rates are used (e.g. FRED, NBER)
Done.
siamond wrote:
Sun Aug 25, 2019 11:08 am
2. would be cool if all tabs in the spreadsheet would start the modeled returns on the same row (e.g. row 7 instead of either row 6 or row 7)
I'll do that in the next version.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sun Aug 25, 2019 4:43 pm

longinvest wrote:
Sat Jan 19, 2019 2:07 pm
I would keep things simple. If you want to extend Treasury index fund historical returns with approximations back until 1871, I would go with the index fund returns when available, then use a close-enough active fund's returns for missing years, when available, and finally patch the rest with the index fund's matching model. Here's an example:

Short-Term Treasury Index Fund:
  • Fund (3 to 2-year) from 1871 until inception of VFISX
  • Vanguard Short-Term Treasury Fund (VFISX/VFIRX) from inception until inception of VSBSX
  • Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX) from inception and thereafter
Back to this... For context, my goal was to assemble both active and passive data series for Vanguard ST/IT/LT treasury bond funds. This will find a place in the next update of the Simba spreadsheet. Vanguard isn't making our life simple by referencing distinct benchmarks for similar funds (see all gory details here). Barclays displays some quirks as well with their indices as we'll see.

Let's start by the passive index funds, which are only available in Admiral form. For ST Treasuries, I'd suggest that the logical spliced series should be:

Code: Select all

1871-1975	Longinvest's bonds fund spreadsheet (3-2 model)
1976-2009	Bloomberg Barclays Treasury 1-3 Yr TR USD
2010+		Vanguard Short-Term Treasury Index Fund (VSBSX)
Personally, I came to trust a lot Vanguard's ability to passively track a given index, so it doesn't bother me whatsoever to use an index as a proxy for a long period of time (1976-2009). I find that more preferable than using some historical years of an active fund like VFISX which is documented with a different benchmark.

As a side note, there is also a Bloomberg Barclays US Treasury 1-3 Yr TR USD index (note the "US" qualifier), which started in 1991 and provides annual returns basically equivalent to Bloomberg Barclays Treasury 1-3 Yr TR USD for 1992+. So I am comfortable using the former and get more years out of it.

For LT Treasuries, the logical spliced series could follow the same philosophy:

Code: Select all

1871-1941	Longinvest's bonds fund spreadsheet (30-11 model)
		(crude mapping, by lack of LT interest rates history in this time period)
1942-1972	Longinvest's bonds fund spreadsheet (30-11 model)
1973-2009	Bloomberg Barclays US Treasury Long TR USD
2010+		Vanguard Long-Term Treasury Index Fund (VLGSX)
There is also a Bloomberg Barclays Long Term US Treasury TR USD index, starting in 1987, annual returns being oh-so-slightly different from Bloomberg Barclays US Treasury Long TR USD, but the corresponding growth charts are indistinguishable, so let's forget about it. There is also a Bloomberg Barclays US Treasury 20+ Yr TR USD, but this isn't a match in terms of average maturity and the trajectory is a tad different, this one doesn't seem applicable.

Finally, IT Treasuries. This one is more troublesome as the benchmark index has limited history (2003+). And I would be quite uncomfortable using a synthetic model until 2002. Instead of switching to the corresponding active fund (VFITX, 1992+), maybe we can fill a decade of history with the VFITX benchmark (hence at least staying passive)... This is admittedly a very imperfect compromise:

Code: Select all

1871-1991	Longinvest's bonds fund spreadsheet (10-4 model)
1992-2002	Bloomberg Barclays US Treasury 5-10 Yr TR USD
2003-2009	Bloomberg Barclays US Treasury 3-10 Yr TR USD
2010+		Vanguard Intermediate-Term Treasury Index Fund (VSIGX)
Before you ask, there is no such thing as a Bloomberg Barclays Treasury 3-10 Yr TR USD or Bloomberg Barclays Treasury 5-10 Yr TR USD index (without the "US" qualifier). There is also a Bloomberg Barclays Intermediate Treasury TR USD (1973+) index, its average maturity seems shorter (maybe 3-5 yrs, not 100% sure), and its trajectory is quite disconnected from the 3-10 and 5-10 indices, so I don't think it's applicable.

Thoughts? Feedback?

stlutz
Posts: 5465
Joined: Fri Jan 02, 2009 1:08 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by stlutz » Sun Aug 25, 2019 6:44 pm

Was taking a look at the oldest annual report I could find for VFITX on EDGAR, which was from 2006: https://www.sec.gov/Archives/edgar/data ... efinal.htm

Back then the fund and it's benchmark (5-10 year) displayed the same discrepancy as today. That is, the fund had a duration of 5.2 and the benchmark had a duration of 6.0.

Unless a comparison of the synthetic returns vs. actual VFITX returns shows something different, I would think that the acutal returns of VFITX for 1992-2002 would be more consistent with what you are using before/after than switching to a longer-term benchmark for that time period. As long as I've been looking, VFITX has always had a duration of just over 5. So, I guess my preference ranking would be:

1) VFITX
2) the longinvest data
3) Using the 5-10 benchmark

Option #3 is just different from the other streams being tied together. Not in a major way, but still in a way that matters given that there were major changes in interest rates over the span of years.

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by siamond » Mon Aug 26, 2019 11:43 pm

stlutz wrote:
Sun Aug 25, 2019 6:44 pm
As long as I've been looking, VFITX has always had a duration of just over 5. So, I guess my preference ranking would be:

1) VFITX
2) the longinvest data
3) Using the 5-10 benchmark

Option #3 is just different from the other streams being tied together. Not in a major way, but still in a way that matters given that there were major changes in interest rates over the span of years.
I understand your point, but did you check this post? In the years 1992-2002, it doesn't seem to me that VFITX would be a good candidate. In the past decade (2010+), you would be absolutely right, if we put the ER math aside, VFITX would be a truly excellent proxy for VSIGX, but in the early years of VFITX, I don't think that's true.

Here is a telltale chart between VFITX (using gross returns, which means regular returns BEFORE expense ratio is factored in) and its benchmark (Barclays 5-10). As you can see, VFITX actually returned more (relatively speaking) than the 5-10 index until 2007-ish. Then, after a few hiccups with the financial crisis, it started to decline (I believe the managers started to track 3-10 by then, but never made it official). So... I would actually think that using the 5-10 index would be a better option than using VFITX (e.g. GR series + ER adjustment).

Image

This being said, it IS a different benchmark that the other streams, you're absolutely right, and it IS a bad compromise. Maybe using longinvest's 10-4 model till 2002 is the way to go... As we see on the telltale, this model steadily returned less than the 5-10 index, which makes perfect sense.

PS. Bloomberg Barclays US Treasury 3-5 Yr TR USD starts in 1992 and so does Bloomberg Barclays US Treasury 5-10 Yr TR USD. Would be lovely to have a good way to combine them for a 3-10 series... :wink:

stlutz
Posts: 5465
Joined: Fri Jan 02, 2009 1:08 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by stlutz » Mon Aug 26, 2019 11:52 pm

siamond wrote:
Mon Aug 26, 2019 11:43 pm

I understand your point, but did you check this post?
I did not--nice research however you were able to dig that up!

In the case, my vote would be to use the longinvest data.

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by siamond » Tue Aug 27, 2019 10:26 am

stlutz wrote:
Mon Aug 26, 2019 11:52 pm
siamond wrote:
Mon Aug 26, 2019 11:43 pm
I understand your point, but did you check this post?
I did not--nice research however you were able to dig that up!

In the case, my vote would be to use the longinvest data.
Yes, agreed, let's settle on:

Code: Select all

1871-2002	Longinvest's bonds fund spreadsheet (10-4 model)
2003-2009	Bloomberg Barclays US Treasury 3-10 Yr TR USD
2010+		Vanguard Intermediate-Term Treasury Index Fund (VSIGX)

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by siamond » Tue Aug 27, 2019 10:41 am

While we're at it and since we'll discuss the mapping of the active bond funds later on, here is more detailed historical data about average maturity (using monthly data points when available) and about the maturity breakdowns (last known data point for the year). Note how VFITX extended way into ST and LT bonds territory at times... Bottomline: VFITX has been quite active and is a very different beast than its passive counterpart (VSIGX).

Image

Image

Image

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - Shiller: From Rates to Returns [Bond Fund Simulator]

Post by siamond » Wed Aug 28, 2019 12:03 pm

Let's finish our updated mappings for Simba... Let's move to the active (treasury) funds.
longinvest wrote:
Thu Jan 17, 2019 6:23 pm
For active Treasury funds, I would use their benchmark as guide:
siamond wrote:
Tue Jan 15, 2019 11:14 am
Vanguard Short-Term Treasury Fund (VFISX/VFIRX):
- active fund, treasuries only
- benchmark: Bloomberg Barclays U.S. 1-5 Year Treasury Bond Index
Given the Bloomberg Barclays U.S. 1-5 Year Treasury Bond Index* benchmark, I would match it to Bond Fund (5 to 2-year).
* Includes U.S. Treasury obligations with maturities of 1 to 5 years.
siamond wrote:
Tue Jan 15, 2019 11:14 am
Vanguard Intermediate-Term Treasury Fund (VFITX/VFIUX):
- active fund, treasuries only
- benchmark: Bloomberg Barclays U.S. 5-10 Year Treasury Bond Index
Given the Bloomberg Barclays U.S. 5-10 Year Treasury Bond Index* benchmark, I would match it to Bond Fund (10 to 6-year).
* Includes U.S. Treasury obligations with maturities of 5 to 10 years.
siamond wrote:
Tue Jan 15, 2019 11:14 am
Vanguard Long-Term Treasury Fund (VUXTX/VUSUX):
- active fund, treasuries only
- benchmark: Bloomberg Barclays U.S. Long Treasury Bond
Given the Bloomberg Barclays U.S. Long Treasury Bond* benchmark, I would match it to Bond Fund (30 to 11-year).
* Includes U.S. Treasury obligations with remaining maturities of 10+ years.
I have been a bit hesitant about this guideline, if only because the current mapping in Simba for VFITX (IT Treasury) is the 10-4 bond fund, not 10-6. Which does map better to what the fund appears to be doing nowadays. But checking the corresponding history, it is pretty clear that the fund tracked much closer to a 5-10 index (i.e the official benchmark) by then. So, when backfilling older years, it does make sense to stick to said benchmark (plus it's more intuitive!). Similarly, the current Simba mapping for VFISX (ST Treasury) is the 4-2 bond fund, which better matches today's trajectory, but in the early days, the benchmark (1-5 index) was followed more closely.

Bottomline, I agree with longinvest's recommendation. Which leads to the corresponding spliced series:

Code: Select all

1871-1975	Longinvest's bonds fund spreadsheet (5-2 model)
1976-1991	Bloomberg Barclays Treasury 1-5 Yr TR USD
1992+		Vanguard Short-Term Treasury Fund (VFISX/VFIRX)

Code: Select all

1871-1991	Longinvest's bonds fund spreadsheet (10-6 model)
1992+		Vanguard Intermediate-Term Treasury Fund (VFITX/VFIUX)

Code: Select all

1871-1941	Longinvest's bonds fund spreadsheet (30-11 model)
		(crude mapping, by lack of LT interest rates history in this time period)
1942-1972	Longinvest's bonds fund spreadsheet (30-11 model)
1973-1986	Bloomberg Barclays US Treasury Long TR USD
1987+		Vanguard Long Term Treasury Fund (VUSTX/VUSUX)
(Note: Bloomberg Barclays Treasury 5-10 Yr TR USD started in 1992)

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by siamond » Thu Aug 29, 2019 7:56 am

Let's move to Total-Bonds now. VBMFX/VBTLX tracks the Bloomberg Barclays US Aggregate Bond TR USD index, annual index returns starting in 1976 (the fund itself started in 1987). The factsheet of the index doesn't say much about maturity.

Please find below charts reflecting the history I could gather about the fund. Its average effective maturity average since inception has been 7.8 years. It is currently 8.2 years.

Image

Here is a historical chart of the stated maturity breakdown. Note that there is a good amount of LT and ST maturities in the mix. A breakdown expressed in terms of effective maturity would be less skewed towards LT maturities though (e.g. see here).

Image

The current mapping in Simba is bond fund model 10-2, which baffles me a bit. Not sure how we ended up with such mapping, but this doesn't seem quite right (and it's a poor match of the actuals of the index -or the fund-).

We probably should move to something like 10-6. But given the spread of maturities covered by the fund, I wonder if we shouldn't use something broader? Thoughts?

EDIT: updated charts and text to make more clear that the two charts aren't about the same thing (first is effective maturity, second is stated maturity).
Last edited by siamond on Sun Sep 01, 2019 1:22 pm, edited 1 time in total.

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Thu Aug 29, 2019 8:19 am

siamond wrote:
Thu Aug 29, 2019 7:56 am
The current mapping in Simba is bond fund model 10-2, which baffles me a bit. Not sure how we ended up with such mapping, but this doesn't seem quite right (and it's a poor match of the actuals of the index -or the fund-).

Minimally we probably should move to 10-6. But given the spread of maturities covered by the fund, I wonder if we shouldn't use something broader? Thoughts?
Total bond includes corporates which often have call provisions, get upgrades and downgrades, etc. Even Treasuries used to be callable; that was pretty bad for long-term Treasury investors who were able to buy them at high yields during the late 70s only to have them called a few years later when yields went down.

As a result of the broad mix in a Total Bond Market fund, it gets a smooth growth. The 10-6 fund would be way more volatile. When I look at the comparative growth trajectories of Vanguard's Total Bond and of the 10-2 fund, they're similar enough in both growth and volatility (total bond is still a little smoother):
longinvest wrote:
Fri Aug 26, 2016 2:10 pm
siamond wrote:One post on the SBBI thread which would probably be better discussed here:
longinvest wrote:Note that the differences between the 10-2 and 10-4 model don't change things much. They both behave as intermediate funds, but the 10-4 model is somewhat more volatile due to its longer average duration. I like the 10-2 model because it seems closer to the smooth behavior of total bonds, while the 10-4 model behaves more like an intermediate treasury fund. I personally invest in domestic nominal total bonds, thus my preference.
This is an interesting point as we have an Intermediate Term Treasury fund in Simba (anchored on VFITX) and we have a Total-Bond fund as well (anchored on VBMFX). So far, based on earlier discussions, I used the 10-4 model for historical returns for both, but maybe I oversimplified. Any more views on this?
Image

Image

Just consider that the premium VBMFX had over Fund 10-2 (due to its sub-allocation to longer bonds and corporates) paid for its ER. :wink:

I know, it's cheating, but do we have anything better for 1871-1986?
Also, the 10-2 fund has the self-correcting property discussed in the first post due to the availability of 10-year and 1-year yields going as far back as 1871, thanks to Shiller's data. It's modeled in such a way that an investor could have implemented his bond portfolio in real life before the existence of low-cost bond index mutual funds.

So, maybe we should somehow view it as the "default bond portfolio" (of intermediate average maturity) held by an investor, which happens to be the 10-2 fund until the creation of Vanguard's total bond fund.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by siamond » Thu Aug 29, 2019 3:16 pm

longinvest wrote:
Thu Aug 29, 2019 8:19 am
As a result of the broad mix in a Total Bond Market fund, it gets a smooth growth. The 10-6 fund would be way more volatile. When I look at the comparative growth trajectories of Vanguard's Total Bond and of the 10-2 fund, they're similar enough in both growth and volatility (total bond is still a little smoother) [...]
Also, the 10-2 fund has the self-correcting property discussed in the first post due to the availability of 10-year and 1-year yields going as far back as 1871, thanks to Shiller's data. It's modeled in such a way that an investor could have implemented his bond portfolio in real life before the existence of low-cost bond index mutual funds.
All good points and you're right, 10-6 is more volatile than 10-2 (stdev 4.8 vs 5.5). BUT... sticking to 10-2 would come with quite a disconnect in terms of average maturity, which in turn translates in a CAGR loss of half a point compared to the Barclays index.

First, let's compare VBMFX/VBTLX Gross Returns (that is, Total Returns minus Expense Ratio) with its index. Growth chart and Telltale chart below. Vanguard does a great job, no question, aside from a couple of 'hiccup' years. Conversely, the index (minus ER) is a good representation of the reality of the investor's returns.

Image

Now let's compare the index (which started end of 1975, hence one more decade of data) with the 10-2 and 10-6 models. The steady decline of 10-2 relative to the index is quite glaring (and unsurprising, given the average maturity of ~8 yrs displayed by VBMFX). That being said, the 10-6 mapping is not entirely satisfying either (it ends well, but I might not have said the same thing 15 years ago).

Image

Why not explore an option with a broader set of maturities? Something like 15-2? This would get closer to VBMFX average maturity, this would better capture the diversity of VBMFX, and we do have 20yrs yields going back to 1942, so this should be closer to reality, isn't it? Worth a try?

PS. it would be very easy to keep the 10-2 data series in the 'splicing' part of the new (work in progress!) Simba, while using another series by default. Savvy users will just have to flip one boolean to use one model or the other to complement index and fund returns.

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Thu Aug 29, 2019 3:29 pm

Lengthening the bond fund average maturity (e.g. 15-2) will increase volatility. Just look at the 30-2 fund to get an idea. By construction, the model gives slightly more weight to longer maturities than to shorter ones (all coupons and maturing capital being reinvested on the long end). The total market is (currently, at least) shaped differently; there are more short-term issues than longer-term issues in terms of market weights.

I think that trying to reconstruct a total-market fund which includes corporates, call features, upgrade/downgrades, etc., with the very simple model of the bond fund simulator would be a mistake.

That's why I'm proposing to just accept that we don't have a good proxy, but we have a ladder-like bond fund (similar to a 10-year bond ladder except for selling bonds when they become cash instruments) that could have been owned by a real life investor before the creation of a low-cost total-market bond index fund, which displays similar volatility (and close-enough returns after expenses for the period after 1987). If, somehow, we had total-market index returns before 1987, we could use that instead. I would use the 10-2 fund for years when we have no index or real fund returns. We just shouldn't apply an expense ratio on top of a portfolio of 9 bonds directly held by an investor making a single sell transaction and a single buy transaction per year. :wink:
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by siamond » Fri Aug 30, 2019 4:28 pm

longinvest wrote:
Thu Aug 29, 2019 3:29 pm
Lengthening the bond fund average maturity (e.g. 15-2) will increase volatility. Just look at the 30-2 fund to get an idea. By construction, the model gives slightly more weight to longer maturities than to shorter ones (all coupons and maturing capital being reinvested on the long end). The total market is (currently, at least) shaped differently; there are more short-term issues than longer-term issues in terms of market weights.
Well, maybe, but I still would be curious to give it a try. VBMFX maturity breakdown included ~40% of 10+yrs maturities and it seems a little odd to restrict ourselves to maturities up to 10 years with the corresponding model.
longinvest wrote:
Thu Aug 29, 2019 3:29 pm
I think that trying to reconstruct a total-market fund which includes corporates, call features, upgrade/downgrades, etc., with the very simple model of the bond fund simulator would be a mistake.
This is a crude mapping for sure, it has been (and will remain) marked as such in the Simba spreadsheet. As a side note, the new splicing logic will allow to disable every crude mapping by switching one toggle. But the fact that it's crude doesn't preclude to try to match the actuals (index/fund years) as best as we can, and fact is 10-2 is not doing a terribly good job of that.
longinvest wrote:
Thu Aug 29, 2019 3:29 pm
That's why I'm proposing to just accept that we don't have a good proxy, but we have a ladder-like bond fund (similar to a 10-year bond ladder except for selling bonds when they become cash instruments) that could have been owned by a real life investor before the creation of a low-cost total-market bond index fund, which displays similar volatility (and close-enough returns after expenses for the period after 1987). If, somehow, we had total-market index returns before 1987, we could use that instead. I would use the 10-2 fund for years when we have no index or real fund returns. We just shouldn't apply an expense ratio on top of a portfolio of 9 bonds directly held by an investor making a single sell transaction and a single buy transaction per year. :wink:
Yes, we do have the Barclays index numbers starting from 1976 and I'll use those for sure. So the only question is what crude proxy should we use before that? Should we use something that aims at emulating what the index fund would have looked like by then, or should we try to do something that would have been investible by then? I respect the idea of the 2nd goal, but this is not consistent with everything we've done for other synthetic data series. We always aimed at the first goal, which of course implies that the model should match the known actuals as best as possible.

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by siamond » Fri Aug 30, 2019 4:38 pm

So let's give it another try and include the 10-4 model in the mix, comparing to the Barclays index.

Image

As previously mentioned, 10-2 keeps losing ground to the index, this is a poor match. 10-6 is admittedly not great either, returning too much over the past decade. Somehow it caught up to the index, but this seems more luck of start/end dates than a true pattern. Overall, the three models lost ground compared to the index in the early years, not sure why (any clue?). The 10-4 trajectory became fairly flat in the Telltale chart after those early years, which is a good sign. So let's focus on the past 30 years, the years of existence of VBMFX.

Image

The case becomes clearer, 10-4 seems the best match we have so far. This also (partly) accommodates longinvest's concern about volatility (lower than 10-6, I checked) while staying reasonably close to the average maturity displayed by VBMFX over time. At this point, this seems like the best candidate to me (I believe this was our initial choice when we started the whole project, btw). I would still be curious to test 15-2 though... :wink:

PS. the strange peak on the Telltale charts occurred during the chaos of the financial crisis. I strongly suspect that a monthly simulation model would show a less volatile trajectory. Maybe AlohaJoe could confirm?

User avatar
siamond
Posts: 5022
Joined: Mon May 28, 2012 5:50 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by siamond » Sun Sep 22, 2019 11:31 pm

A question that was asked on an unrelated thread of mine, but which should really be discussed here.
Lee_WSP wrote:
Sun Sep 22, 2019 10:40 am
MotoTrojan wrote:
Sun Sep 22, 2019 9:40 am
Lee_WSP wrote:
Sat Sep 21, 2019 10:59 am
MotoTrojan wrote:
Sat Sep 21, 2019 10:30 am
Lee_WSP wrote:
Fri Sep 20, 2019 5:37 pm
Does anyone know why Simba's LETF spreadsheet's EDV returns over the 1965 - 1985 period are so much lower than 20 year treasuries? Is it because of zero coupon?
It did seem to be odd how much lower it was (drawdown worse than 60% compared to something in the 20’s ic I recall right), but it should certainly be lower by some amount due to higher duration.
It also never bounces back. It barely resembles the LTT growth chart.
Worth noting that these are simulated returns, not real. These assets were not created that early.
Hence my question. Is this a problem with the model, or is this a reasonable approximation of what happens to EDV during rising interest rate regimes?
Longinvest, any comment?

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Mon Sep 23, 2019 6:51 am

siamond wrote:
Sun Sep 22, 2019 11:31 pm
A question that was asked on an unrelated thread of mine, but which should really be discussed here.
Lee_WSP wrote:
Sun Sep 22, 2019 10:40 am
MotoTrojan wrote:
Sun Sep 22, 2019 9:40 am
Lee_WSP wrote:
Sat Sep 21, 2019 10:59 am
MotoTrojan wrote:
Sat Sep 21, 2019 10:30 am

It did seem to be odd how much lower it was (drawdown worse than 60% compared to something in the 20’s ic I recall right), but it should certainly be lower by some amount due to higher duration.
It also never bounces back. It barely resembles the LTT growth chart.
Worth noting that these are simulated returns, not real. These assets were not created that early.
Hence my question. Is this a problem with the model, or is this a reasonable approximation of what happens to EDV during rising interest rate regimes?
Longinvest, any comment?
Siamond, first, here's a post you wrote about it a while ago:

Do long-term bonds belong in one's portfolio?
siamond wrote:
Thu Dec 27, 2018 11:56 pm
longinvest wrote:
Thu Dec 27, 2018 9:25 pm
siamond wrote:
Mon Dec 24, 2018 3:00 pm
longinvest wrote:
Mon Dec 24, 2018 2:29 pm
I think that I could use this estimated zero-coupon yield curve to create a synthetic EDV-like fund: a zero-coupon ladder-like fund 30-to-21 years, equal-par weighted. I'll try to do that in the near future and post the result on the Historical Bond Returns - Shiller: From Rates to Returns thread.
Yeah, my first Xmas gift! :wink:

More seriously, yes, this would be terrific, but no rush. :beer
OK, I'm a little late for Xmas, but it's done and uploaded. See this post for details.
I ran a quick backtest of the zero-coupon 30-21 synthetic model against the index tracked by Vanguard EDV (i.e. Bloomberg Barclays 20-30Y Treasury Strips TR USD). Here is a growth chart expressed in real terms (in other words, a telltale chart against inflation) comparing the two trajectories since the index' inception. I also included the index tracked by Vanguard Long-Term Treasury Fund (VUSTX), and its corresponding model in longinvest's updated spreadsheet.

Image

The model tends to drift a tiny bit lower than reality (the index) in both cases, but this remains a really good match. Which means that what the returns computed by the model for the pre-1997 years is probably a pretty good approximation of what an LT STRIPs fund would have returned. Nice modeling job.

PS. I disabled the display of EDV itself on the chart, as it was overlapping very closely its index and was just cluttering the display. This indicates that whatever friction costs due to stripping should be very low. And that Vanguard does a really good job of tracking the index.
The simulator starts with available historical yields, uses a linear approximation to estimate missing yields on the curve, calculates corresponding zero-coupon yields, and finally, uses these zero-coupon yields to calculate, each year, the return of a fund which contains 10 zero-coupon bonds with 30, 29, ..., 21 year maturities weighted such that their par values are equal. I encourage interested readers to download the simulator (links are in the first post of this thread) and to look at the calculations.

As an answer this question:
Lee_WSP wrote:
Sun Sep 22, 2019 10:40 am
Is this a problem with the model, or is this a reasonable approximation of what happens to EDV during rising interest rate regimes?
I think that the EqPar Zero Fund (30 to 21-year) provides a reasonable approximation of what could have happened to an EDV-like fund, especially when considered in comparison to the behavior of Bond Fund (30 to 11-year) which models a long-term treasury fund, because approximated missing yields are shared by both funds.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

Lee_WSP
Posts: 1208
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by Lee_WSP » Mon Sep 23, 2019 9:53 am

EDV pays a quarterly dividend. Would that make a difference in the model's historical approximation?

Topic Author
longinvest
Posts: 3973
Joined: Sat Aug 11, 2012 8:44 am

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by longinvest » Mon Sep 23, 2019 10:10 am

Lee_WSP wrote:
Mon Sep 23, 2019 9:53 am
EDV pays a quarterly dividend. Would that make a difference in the model's historical approximation?
Strips don't pay coupons, that's why they have a very long duration.

It's easy for a real-life zero-coupon bond fund to create synthetic dividends from cash flows due to internal rebalancing and external contributions and redemptions. Whether the money is (re)invested into the fund or distributed to investors through dividends doesn't change the total time-weighted returns of the fund.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

AlohaJoe
Posts: 4930
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Historical Bond Returns - From Rates to Returns [Bond Fund Simulator]

Post by AlohaJoe » Mon Sep 23, 2019 6:24 pm

siamond wrote:
Fri Aug 30, 2019 4:28 pm
longinvest wrote:
Thu Aug 29, 2019 3:29 pm
I think that trying to reconstruct a total-market fund which includes corporates, call features, upgrade/downgrades, etc., with the very simple model of the bond fund simulator would be a mistake.
This is a crude mapping for sure, it has been (and will remain) marked as such in the Simba spreadsheet.
I agree with longinvest and I'm not sure that including it in Simba does more good than harm. A long time ago I looked (briefly) into simulating total bond market returns and came away dubious of the prospect. The main problem I had was the changing composition of the "total market" and the reality that the only comparison available (1976-onwards) coincided with the biggest change in index history: the rise of mortgage backed securities. They didn't exist at all before 1976. Today they make up something like 1/4th of the market.

So I had little confidence that something that was fudged to track post-1976 returns would actually map to pre-1976 returns without some way to at least check the composition of the total market. In 1970 were corporate bonds 25% of the total market, like they are today? Or were they 50%?

Just looking at this randomly Googled chart of bond issues since 1980 shows the problem

Image

Post Reply