Convexity information on Vanguard bond funds

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linuxizer
Posts: 1553
Joined: Wed Jan 02, 2008 7:55 am

Convexity information on Vanguard bond funds

Post by linuxizer » Mon Feb 01, 2010 10:20 pm

I wrote Vanguard to ask for convexity info on their funds. This is the response I got:

Thank you for taking the time to contact us.

Vanguard bond funds do not provide convexity information.

I have forwarded your suggestion to provide convexity on Vanguard bond
funds to our management team for review. We are constantly accepting ideas
for improvement on our site, and it is often through recommendations such
as yours that enhancements are made. Please submit any other suggestions
for our consideration, as Vanguard is committed to offering the highest
quality service to our investors.

If you have additional questions, please call Vanguard Voyager Services(R)
at 800-284-7245. You can reach us on business days from 8 a.m. to 10 p.m.
and on Saturdays from 9 a.m. to 4 p.m., Eastern time.

Sincerely,

Tom Waldbart
Registered Representative
Vanguard Retail Investor Group


I'm a little disappointed honestly that they don't provide this information. Although Vanguard makes it easier than most to find duration information, so I can't complain too much. If other people are interested in the convexity of funds, do write in to let them know.

For more information on why convexity matters:
http://www.bogleheads.org/wiki/Bonds:_A ... #Convexity

I have read intimations that fund managers whose incentives are misaligned towards short-term profits over long-term investor wellbeing can deliberately seek out bonds with low convexity. Because they are priced accordingly, the yield looks higher, even though it comes at the cost of higher risk. My guess is Vanguard doesn't do this, so it would be great if they would start a precedent of publishing the info. It would also help in understanding what would happen to our funds when market yields change.

wwhan
Posts: 97
Joined: Sun Mar 04, 2007 12:08 am
Location: CA

Post by wwhan » Mon Feb 01, 2010 10:38 pm

Vanguard Bond desk search shows the convexity info on individual bonds, before you buy them. Just click on the bond for the info and then the calculator (in the lower left corner of the calculator). The AA to AAA rated 1-10 yr GO Munis are typically 0.1 to 0.2 convexity.

Don

grok87
Posts: 7480
Joined: Tue Feb 27, 2007 9:00 pm

Re: Convexity information on Vanguard bond funds

Post by grok87 » Mon Feb 01, 2010 10:52 pm

linuxizer wrote:I wrote Vanguard to ask for convexity info on their funds. This is the response I got:

Thank you for taking the time to contact us.

Vanguard bond funds do not provide convexity information.

I have forwarded your suggestion to provide convexity on Vanguard bond
funds to our management team for review. We are constantly accepting ideas
for improvement on our site, and it is often through recommendations such
as yours that enhancements are made. Please submit any other suggestions
for our consideration, as Vanguard is committed to offering the highest
quality service to our investors.

If you have additional questions, please call Vanguard Voyager Services(R)
at 800-284-7245. You can reach us on business days from 8 a.m. to 10 p.m.
and on Saturdays from 9 a.m. to 4 p.m., Eastern time.

Sincerely,

Tom Waldbart
Registered Representative
Vanguard Retail Investor Group


I'm a little disappointed honestly that they don't provide this information. Although Vanguard makes it easier than most to find duration information, so I can't complain too much. If other people are interested in the convexity of funds, do write in to let them know.

For more information on why convexity matters:
http://www.bogleheads.org/wiki/Bonds:_A ... #Convexity

I have read intimations that fund managers whose incentives are misaligned towards short-term profits over long-term investor wellbeing can deliberately seek out bonds with low convexity. Because they are priced accordingly, the yield looks higher, even though it comes at the cost of higher risk. My guess is Vanguard doesn't do this, so it would be great if they would start a precedent of publishing the info. It would also help in understanding what would happen to our funds when market yields change.


I agree. Pimco doesn't show convexity but they do show something like it. I haven't quite figured it out yet. THey call it bull duration delta and bear duration delta. I think it's how the duration of the fund changes as interest rates change. Which is what convexity is- the second derivative of the fund value (or the first derivative of the duration ) with respect to interest rates.
http://www.pimco-funds.com/Statistics.aspx
cheers,
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

wwhan
Posts: 97
Joined: Sun Mar 04, 2007 12:08 am
Location: CA

Post by wwhan » Tue Feb 02, 2010 1:56 am

There is an interesting bond calculator here;

http://www.ftlabs.com/WebFISC/home.jsf

It seems to calculate convexity and duration from the other bond info, like call date coupon, price, dates.

Don

linuxizer
Posts: 1553
Joined: Wed Jan 02, 2008 7:55 am

Post by linuxizer » Tue Feb 02, 2010 6:10 am

grok- Thanks for pointing out what PIMCO does. Sounds like the assymetry of convexity is something worth looking into, or if it only applies to bonds with options.

wwhan- I was hoping for info on the convexity of funds, rather individual bonds. I've added this as a disadvantage to funds in the interminable wiki "bonds v. funds" page.

wwhan
Posts: 97
Joined: Sun Mar 04, 2007 12:08 am
Location: CA

Post by wwhan » Tue Feb 02, 2010 11:26 am

For a bond fund, it would seem that the underlying grade rating of the bonds and the difference between the average duration and average maturity should provide some correlation to convexitity. If the bonds are called early, then the interest rate going up would have less effect. Also, if the bonds have a higher rating, then the convexitivity should be less.

Don

grok87
Posts: 7480
Joined: Tue Feb 27, 2007 9:00 pm

Post by grok87 » Tue Feb 02, 2010 8:58 pm

wwhan wrote:For a bond fund, it would seem that the underlying grade rating of the bonds and the difference between the average duration and average maturity should provide some correlation to convexitity. If the bonds are called early, then the interest rate going up would have less effect. Also, if the bonds have a higher rating, then the convexitivity should be less.

Don

Don,
What you are saying is not in fact true for a bond portfolio. In other words you can't estimate whether the portfolio of bonds has negative, zero, or positive convexity by looking at the gap between maturity and duration. And I don't think bond quality has any relation either.

However for an individual bond, there is truth in what you say. A 20 year treasury bond has a maturity of 20 years and a duration of 12. If there is a 20 year bond with a 10 year call, it's duration could be shorter if the bond is expected to be called- probably more like 8.5 years.

cheers,
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

wwhan
Posts: 97
Joined: Sun Mar 04, 2007 12:08 am
Location: CA

Post by wwhan » Tue Feb 02, 2010 11:40 pm

So you have explained why one does not see convexity listed for bond funds. One can figure it out for all the individual bonds at any moment, but then how does one consolidate the convexity for each bond for the whole fund? One could just put in an average of the convexity for the fund, but that would not be very useful. One could take the square root of the sum of the squares of the convexitivy of each bond, but the any negative convexity drops out. In addition, the numbers would continuiously change over time.

Don

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