Correct Bond Yield of this Fund

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Mulliganx
Posts: 14
Joined: Tue Nov 07, 2017 9:09 pm

Correct Bond Yield of this Fund

Post by Mulliganx » Sat Nov 16, 2019 11:23 am

The Vanguard bond yields are not straight forward to me since there are several.

1. SEC 30-Day yield = 1.81%
2. Yield to Maturity = 1.9%
3. Average Coupon = 4.6%

I am running calculations if a municipal bond investment is right for me and I need to use the "Yield" as a factor. Right now I am using 1.81% in case I do not keep $ in the fund for the 16.5 year duration, but not entirely sure if this is correct.

Thanks in advance, the bond index in question is below

https://investor.vanguard.com/mutual-fu ... olio/vnytx

hudson
Posts: 2051
Joined: Fri Apr 06, 2007 9:15 am

Re: Correct Bond Yield of this Fund

Post by hudson » Sat Nov 16, 2019 12:57 pm

Mulliganx wrote:
Sat Nov 16, 2019 11:23 am
The Vanguard bond yields are not straight forward to me since there are several.

1. SEC 30-Day yield = 1.81%
2. Yield to Maturity = 1.9%
3. Average Coupon = 4.6%

I am running calculations if a municipal bond investment is right for me and I need to use the "Yield" as a factor. Right now I am using 1.81% in case I do not keep $ in the fund for the 16.5 year duration, but not entirely sure if this is correct.

Thanks in advance, the bond index in question is below

https://investor.vanguard.com/mutual-fu ... olio/vnytx
I use the SEC Yield to compare funds. I like the distribution yield because that's what you get at the end of the month. Distribution yield is accurate to the penny, BUT, it changes every month. The distribution yield for VNYTX was 2.84% last month. Maybe look at the distribution yields over the last 18 months and make an estimate about next month. https://investor.vanguard.com/mutual-fu ... ions/vnytx

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grabiner
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Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Correct Bond Yield of this Fund

Post by grabiner » Sat Nov 16, 2019 5:03 pm

The SEC yield is the number you want in order to evaluate future returns. It is the yield to maturity of the bonds in the fund, minus the expense ratio. Thus, if you held the bonds to maturity, this is the return you would get; if you (or the fund) sells the bonds, it is the return you expect, but you may get more or less because of unexpected changes in interest rates.

The average coupon is not even the same as the distribution yield; it is the coupon yield when a bond was issued, while the distribution yield is based on the yield when the bond was bought.

For example, suppose that a bond was issued for $1000 and paid $50 in coupons every year. The fund buys the bond for $1100 ten years before maturity. The coupon yield of the bond is now 4.54%, since it has a $50 coupon on a current value. But the fund does not distribute the full $50 coupon; it distributes $40 for a 3.63% distribution yield (not quite accurate because of compounding issues, but close), and keeps the other $10 as return of capital, decreasing the bond value by $10 so that there is no capital loss at maturity.

For a taxable bond, this treatment is better for you than taxing the full coupon (as you would otherwise be required to pay tax every year on income which exceeded the bond return), and for a municipal bond, the IRS requires it in order to prevent investors from buying tax-free income and a guaranteed capital loss.
Wiki David Grabiner

hudson
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Joined: Fri Apr 06, 2007 9:15 am

Re: Correct Bond Yield of this Fund

Post by hudson » Sat Nov 16, 2019 7:44 pm

I am sure the David Grabiner is correct.
I am not an expert...just an observer.

Aren't there many other factors which affect future returns besides just the SEC Yield? It seems like lately that market forces are influencing the NAV (Net Asset Value or the bond fund price).

The NAV has risen almost $1 since this time last November. Is that due to SEC Yield type factors?
The distribution yield is 2.84%; it's been dropping, but I would guess that's because the NAV has gone up.
I agree that the SEC Yield is a good number...but how many months or years will it take the distribution yield to get down to the SEC Yield?
The distribution yield is real money. The owners of VNYTX were distributed 2.84% (annual rate) or 2.9 cents per share on Nov. 1st. The fund has been paying about 3 cents a share since June 1, 2018.
To me, the SEC Yield is a warning, that at some point, the muni bond fund could be distributing 1.8%. It's kind of a vague number about the future, but very accurate. To me the distribution yield is real...money in my pocket...money that I have to pay state taxes on.

To change the subject, if I lived in NY, I wouldn't buy YNYTX because it's Vanguard Risk Potential 3 and that's likely because it's a long bond fund. I'd stick with intermediate.

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grabiner
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Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Correct Bond Yield of this Fund

Post by grabiner » Sun Nov 17, 2019 12:26 am

hudson wrote:
Sat Nov 16, 2019 7:44 pm
I am sure the David Grabiner is correct.
I am not an expert...just an observer.

Aren't there many other factors which affect future returns besides just the SEC Yield? It seems like lately that market forces are influencing the NAV (Net Asset Value or the bond fund price).
The SEC yield is based on the yield to maturity. If the distribution yield exceeds the SEC yield and rates don't change, the NAV will decline.

This is easiest to see with a single bond. Suppose you bought a bond for $1000 with a $30 annual coupon, and the bond is now worth $1100. The distribution yield is now 2.73%. If you hold the bond to maturity, its value will decline from $1100 to $1000, so the yield to maturity is lower than 2.73%; you will get the income but are guaranteed to lose $100 of principal.

If rates don't change next year, the value of the old bond will fall, while the value of a new bond from the same issuer will stay the same. If rates fall next year, the value of the old bond may still increase, but the value of a new bond from the same issuer will increase more.
To change the subject, if I lived in NY, I wouldn't buy YNYTX because it's Vanguard Risk Potential 3 and that's likely because it's a long bond fund. I'd stick with intermediate.
My recommendation for this situation is to use 50% Vanguard Limited-Term Tax-Exempt, and 50% Vanguard NY Long-Term Tax-Exempt (or similar in other states). This gives you an overall intermediate-term duration, reduces the single-state risk because only half your bonds are in NY, and gives more than half your bond income exempt from NY state tax.
Wiki David Grabiner

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