Intermediate Term Bond Index Funds - Taxable vs. Tax-Exempt Yields

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pubman
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Joined: Sat Jan 09, 2016 10:20 am

Intermediate Term Bond Index Funds - Taxable vs. Tax-Exempt Yields

Post by pubman »

Can anyone explain why in recent years the taxable Intermediate-Term Bond Fund (VBILX) has strongly outperformed the Intermediate-Term Tax-Exempt Fund (VWIUX) even after adjusting for tax rates? YTD is presently 9.10% vs. 3.44%. And do we expect this disparity to continue?

Same question, BTW, for the High-Yield Tax-Exempt Bond fund (VWALX) with a YTD of only 2.25%.
jebmke
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Re: Intermediate Term Bond Index Funds - Taxable vs. Tax-Exempt Yields

Post by jebmke »

The intermediate term bond index fund is approximately 50% invested in Treasury bonds.
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Topic Author
pubman
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Re: Intermediate Term Bond Index Funds - Taxable vs. Tax-Exempt Yields

Post by pubman »

Yes, but that doesn't tell me why the (taxable) Intermediate Bond Fund this year so mightily outperformed the Intermediate Tax Exempt Bond Fund and the Hi-Yield Tax Exempt funds with YTD's of 8.90%, 3.49% and 2.30%, respectively.

I assume it because the taxable fund is mainly U.S. Government and so the large increase is a result of both capital gains and perhaps falling confidence in Munis?

But what's driving my question is that I want to put some cash into a bond fund soon, and if my tax brackets is around 24-32%, is it better to put it in the Intermediate taxable fund or has the gain it has experienced in 2020 now over?

Any and all input would be appreciated.
jebmke
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Re: Intermediate Term Bond Index Funds - Taxable vs. Tax-Exempt Yields

Post by jebmke »

Treasury bonds are inherently less risky than munis. People prefer them and bid up the price. Munis have default risk.
When you discover that you are riding a dead horse, the best strategy is to dismount.
Topic Author
pubman
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Re: Intermediate Term Bond Index Funds - Taxable vs. Tax-Exempt Yields

Post by pubman »

Understood - the less risky bond funds did better this difficult year and so the Intermediate-Term taxable (treasury) Fund performed much better that the Intermediate-Term tax-exempt (muni) Fund.

But I am hoping to get opinions from other Bogleheads as to which Intermediate fund to put cash in NOW. In other words, has the fast run-up in the taxable fund now nearly completely adjusted it for risk and so the expectation is that both funds might now have comparable returns for those of us in higher tax brackets?

So, I'd appreciate any and all thoughts on this.
MikeG62
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Re: Intermediate Term Bond Index Funds - Taxable vs. Tax-Exempt Yields

Post by MikeG62 »

pubman wrote: Wed Sep 09, 2020 9:26 am Understood - the less risky bond funds did better this difficult year and so the Intermediate-Term taxable (treasury) Fund performed much better that the Intermediate-Term tax-exempt (muni) Fund.

But I am hoping to get opinions from other Bogleheads as to which Intermediate fund to put cash in NOW. In other words, has the fast run-up in the taxable fund now nearly completely adjusted it for risk and so the expectation is that both funds might now have comparable returns for those of us in higher tax brackets?

So, I'd appreciate any and all thoughts on this.
30-day SEC yield is currently the same for both funds. So all things being equal, the tax-exempt fund would be better in the shorter-term. However, who knows what rates are going to do going forward. Might treasury yields fall more or rise considerably from where they are now? Don't know the answer. Might muni risks increase? Again, don't really know. Feels like both are overbought at current NAV's.

At these levels I'd rather put new money into FDIC/NCUA insured CD's (to the extent I can uncover above market rates - they do crop up from time to time). FWIW, I have found reasonably attractive deals at two financial institutions over the last 45 days. They don't typically last long so one needs to move quick when they are identified.
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Topic Author
pubman
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Joined: Sat Jan 09, 2016 10:20 am

Re: Intermediate Term Bond Index Funds - Taxable vs. Tax-Exempt Yields

Post by pubman »

Yup, my thinking as well. But at present it might be wise to keep new money in cash to react faster to changes in the market.
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