Bond Yields

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exodusing
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Re: Bond Yields

Post by exodusing »

artbuc wrote: Mon May 13, 2024 1:43 pm Here is good discussion of SEC yield vs distribution yield.

https://investor.vanguard.com/investor- ... bond-funds

Yes, it makes sense to me. SEC yield is a 30 lagging snapshot. Everyone uses same calculation so it is useful tool to compare funds. I would not count on it as a predictor during current times of an activist Fed.
The link you posted disagrees with you last sentence:
It’s helpful to look to the SEC yield as a reasonable forward-looking picture of the current income of the fund, based on current market value.

... distribution yield is an accurate, yet backward-looking, metric; it's not a strong predictor of future earnings or overall total return.
Take a simple case. A bond is issued at $1,000 face value with a 4% coupon. Rates rise to 5% and the bond's market value sinks to $800 (made up for illustration) and you buy at that price with one year to maturity. You hold to maturity. The distribution yield is 4% - $40. SEC yield (YTM) takes into account that you'll also pick up $200 at maturity for a total of $240. Which is a better indication of the return on the bond? What affect will subsequent interest rate changes or Fed activities have on these numbers?
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artbuc
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Re: Bond Yields

Post by artbuc »

Matter of opinion. I said I would not rely on it. Too many moving parts.
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Re: Bond Yields

Post by muffins14 »

artbuc wrote: Mon May 13, 2024 1:43 pm Here is good discussion of SEC yield vs distribution yield.

https://investor.vanguard.com/investor- ... bond-funds

Yes, it makes sense to me. SEC yield is a 30 lagging snapshot. Everyone uses same calculation so it is useful tool to compare funds. I would not count on it as a predictor during current times of an activist Fed.
The fed will always be activist. It exists order to have an active role in the economy.
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muffins14
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Re: Bond Yields

Post by muffins14 »

artbuc wrote: Mon May 13, 2024 1:58 pm Matter of opinion. I said I would not rely on it. Too many moving parts.
What would you rely on in order to decide between two bond funds if you were not relying on SEC yield?
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Beensabu
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Re: Bond Yields

Post by Beensabu »

exodusing wrote: Mon May 13, 2024 1:56 pm SEC yield (YTM) takes into account that you'll also pick up $200 at maturity for a total of $240.
No, it doesn't. SEC yield is not YTM.

It's last month's yield annualized and has nothing to do with the average effective maturity of the fund.

It essentially tells you how much interest you'll probably get in the next year on an investment made today. It doesn't tell you anything about how much that initial investment will be worth in a year.
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exodusing
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Re: Bond Yields

Post by exodusing »

Beensabu wrote: Mon May 13, 2024 2:14 pm
exodusing wrote: Mon May 13, 2024 1:56 pm SEC yield (YTM) takes into account that you'll also pick up $200 at maturity for a total of $240.
No, it doesn't. SEC yield is not YTM.

It's last month's yield annualized and has nothing to do with the average effective maturity of the fund.

It essentially tells you how much interest you'll probably get in the next year on an investment made today. It doesn't tell you anything about how much that initial investment will be worth in a year.
SEC yield is the average YTM of the fund's holding over the past 30 days and therefore takes into account the change in value from purchase price to maturity.

In the real world, you're not going to buy a $1,000 bond for $800 one year from maturity, at least not when interest rates are sane, but I used made up number for illustration.

I can't immediately find a link to the SEC rule, but I did find:
Kevin M wrote: Thu Oct 30, 2014 2:53 pm SEC Yield basically is average YTM over the previous 30 days minus expenses. This formula is mandated by the SEC, so all bond funds that publish yield figures must publish SEC Yield (aka 30-day yield).
Last edited by exodusing on Mon May 13, 2024 2:29 pm, edited 1 time in total.
IDpilot
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Re: Bond Yields

Post by IDpilot »

artbuc wrote: Mon May 13, 2024 1:43 pm Here is good discussion of SEC yield vs distribution yield.

https://investor.vanguard.com/investor- ... bond-funds

Yes, it makes sense to me. SEC yield is a 30 lagging snapshot. Everyone uses same calculation so it is useful tool to compare funds. I would not count on it as a predictor during current times of an activist Fed.
my bold

The SEC Yield is NOT a 30-day lagging snapshot. The SEC Yield for a bond fund uses the Yield to Maturity based on the price of the bonds in the fund at the close of business on the day before the SEC Yield is calculated to compute revenue for the bond fund. That is a forward-looking revenue. You then take the expenses that the fund incurred for the last 30 days and subtract those from the revenue to get the project fund income. That income is divided by the closing price of the fund on the day before. So only the expenses are backward looking.
dbr
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Re: Bond Yields

Post by dbr »

exodusing wrote: Mon May 13, 2024 2:20 pm
Beensabu wrote: Mon May 13, 2024 2:14 pm
exodusing wrote: Mon May 13, 2024 1:56 pm SEC yield (YTM) takes into account that you'll also pick up $200 at maturity for a total of $240.
No, it doesn't. SEC yield is not YTM.

It's last month's yield annualized and has nothing to do with the average effective maturity of the fund.

It essentially tells you how much interest you'll probably get in the next year on an investment made today. It doesn't tell you anything about how much that initial investment will be worth in a year.
SEC yield is the average YTM of the fund's holding over the past 30 days and therefore takes into account the change in value from purchase price to maturity.

In the real world, you're not going to buy a $1,000 bond for $800 one year from maturity, at least not when interest rates are sane, but I used made up number for illustration.
This is correct. The yield is a YTM meaning it is future looking and includes price changes present to maturity as well as cash flows from coupon. The past 30 day part is what the holdings were of different bonds. So SEC yield changes as the present prices of the bonds change, as the time to each cash flow including redemption changes, as cash flows go away by being realized, and as the composition of the fund changes.
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Beensabu
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Re: Bond Yields

Post by Beensabu »

exodusing wrote: Mon May 13, 2024 2:20 pm SEC yield is the average YTM of the fund's holding over the past 30 days and therefore takes into account the change in value from purchase price to maturity.
SEC yield is based on actual distributions for the past 30 days.
The formula for the SEC 30-day yield is as follows:

Yield = 2 {[(a-b)/cd + 1] ^ 6 - 1}

Where:

a = dividends and interest during the period

b = expenses accrued for the periods (net of reimbursements)

c = the average daily number of shares outstanding during the period, that were entitled to receive dividends

d = the maximum offering price per share on the last day of the period
https://admainnew.morningstar.com/webhe ... Yield.html
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artbuc
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Re: Bond Yields

Post by artbuc »

muffins14 wrote: Mon May 13, 2024 2:02 pm
artbuc wrote: Mon May 13, 2024 1:58 pm Matter of opinion. I said I would not rely on it. Too many moving parts.
What would you rely on in order to decide between two bond funds if you were not relying on SEC yield?
I was responding to a different question. I previously posted that SEC yield is most useful in comparing two funds, at least that is what I got from the links I posted. But, I would not assume or rely on it as a predictor, at least not in the same way I would rely on a CD APY.
IDpilot
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Re: Bond Yields

Post by IDpilot »

dbr wrote: Mon May 13, 2024 2:31 pm
exodusing wrote: Mon May 13, 2024 2:20 pm
Beensabu wrote: Mon May 13, 2024 2:14 pm
exodusing wrote: Mon May 13, 2024 1:56 pm SEC yield (YTM) takes into account that you'll also pick up $200 at maturity for a total of $240.
No, it doesn't. SEC yield is not YTM.

It's last month's yield annualized and has nothing to do with the average effective maturity of the fund.

It essentially tells you how much interest you'll probably get in the next year on an investment made today. It doesn't tell you anything about how much that initial investment will be worth in a year.
SEC yield is the average YTM of the fund's holding over the past 30 days and therefore takes into account the change in value from purchase price to maturity.

In the real world, you're not going to buy a $1,000 bond for $800 one year from maturity, at least not when interest rates are sane, but I used made up number for illustration.
This is correct. The yield is a YTM meaning it is future looking and includes price changes present to maturity as well as cash flows from coupon. The past 30 day part is what the holdings were of different bonds. So SEC yield changes as the present prices of the bonds change, as the time to each cash flow including redemption changes, as cash flows go away by being realized, and as the composition of the fund changes.
Not sure I agree that "the funds holdings over the past 30 days" is used. From the instructions in Form N-1A it appears that the SEC Yield computation only takes into account those bonds held at close of business on the day before it is computed and is based on the price of those bonds on that date UNLESS the bond was purchased in the past thirty days in which case you use the purchase price of the bond.

my bold

1. To calculate interest earned on debt obligations for purposes of “a” above:
  • (a) Calculate the yield to maturity of each obligation held by the Fund based on the market value of the obligation (including actual accrued interest) at the close of business on the last business day of each month or, with respect to obligations purchased during the month, the purchase price (plus actual accrued interest). The maturity of an obligation with a call provision(s) is the next call date on which the obligation reasonably may be expected to be called, or if none, the maturity date.
    (b)Divide the yield to maturity by 360 and multiply the quotient by the market value of the obligation (including actual accrued interest) to determine the interest income on the obligation for each day of the subsequent month that the obligation is in the portfolio. Assume that each month has 30 days.
    (c)Total the interest earned on all debt obligations and all dividends accrued on all equity securities during the 30-day (or one month) period. Although the period for calculating interest earned is based on calendar months, a 30-day yield may be calculated by aggregating the daily interest on the portfolio from portions of 2 months. In addition, a Fund may recalculate daily interest income on the portfolio more than once a month.
    (d)For a tax-exempt obligation issued without original issue discount and having a currentmarket discount, use the coupon rate of interest in lieu of the yield to maturity. For atax-exempt obligation with original issue discount in which the discount is based on thecurrent market value and exceeds the then-remaining portion of original issue discount(market discount), base the yield to maturity on the imputed rate of the original issuediscount calculation. For a tax-exempt obligation with original issue discount, wherethe discount based on the current market value is less than the then-remaining portion oforiginal issue discount (market premium), base the yield to maturity on the marketvalue.
dbr
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Re: Bond Yields

Post by dbr »

Beensabu wrote: Mon May 13, 2024 2:38 pm
exodusing wrote: Mon May 13, 2024 2:20 pm SEC yield is the average YTM of the fund's holding over the past 30 days and therefore takes into account the change in value from purchase price to maturity.
SEC yield is based on actual distributions for the past 30 days.
The formula for the SEC 30-day yield is as follows:

Yield = 2 {[(a-b)/cd + 1] ^ 6 - 1}

Where:

a = dividends and interest during the period

b = expenses accrued for the periods (net of reimbursements)

c = the average daily number of shares outstanding during the period, that were entitled to receive dividends

d = the maximum offering price per share on the last day of the period
https://admainnew.morningstar.com/webhe ... Yield.html
The problem is that in SEC Pub N1-a where SEC 30 day yield is defined interest as used in a) above is defined as YTM. There was another thread where someone posted that reference. It is beyond me why the calculation would specify the word interest and then qualify that to YTM in the notes. That publication is 80 or 90 pages long and the discussion of SEC Yield for a bond fund is 50+ pages in. Until that thread I had never seen the exact definition of the term. It is especially frustrating that what you quoted above is repeated everywhere on line without including that critical nuance about "interest." A similar problem abounds where articles quote that YTM of a bond assumes dividends are reinvested when no such assumption is made. That was a big discussion in a previous thread.
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Re: Bond Yields

Post by IDpilot »

Beensabu wrote: Mon May 13, 2024 2:38 pm
exodusing wrote: Mon May 13, 2024 2:20 pm SEC yield is the average YTM of the fund's holding over the past 30 days and therefore takes into account the change in value from purchase price to maturity.
SEC yield is based on actual distributions for the past 30 days.
The formula for the SEC 30-day yield is as follows:

Yield = 2 {[(a-b)/cd + 1] ^ 6 - 1}

Where:

a = dividends and interest during the period

b = expenses accrued for the periods (net of reimbursements)

c = the average daily number of shares outstanding during the period, that were entitled to receive dividends

d = the maximum offering price per share on the last day of the period
https://admainnew.morningstar.com/webhe ... Yield.html
Read the rest of the instructions from the SEC that I just posted on exactly how you compute "a" for debt obligations. Hint, it ain't based on the actual distributions for the past 30 days!
dbr
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Re: Bond Yields

Post by dbr »

IDpilot wrote: Mon May 13, 2024 2:46 pm
Not sure I agree that "the funds holdings over the past 30 days" is used. From the instructions in Form N-1A it appears that the SEC Yield computation only takes into account those bonds held at close of business on the day before it is computed and is based on the price of those bonds on that date UNLESS the bond was purchased in the past thirty days in which case you use the purchase price of the bond.


I don't disagree with that at all. My words were a casual reference to the actual definition in N1-A. People can read the language involved and go from there following the twists and turns of the document. Are you the one who posted that reference before? If so, that is appreciated as it is the only way to figure out what is going on.
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artbuc
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Re: Bond Yields

Post by artbuc »

Wow, no wonder bond funds are so hard to understand. Something as simple as the 30 day SEC yield is subject to debate and disagreement among some very smart and experienced investors.
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Re: Bond Yields

Post by IDpilot »

dbr wrote: Mon May 13, 2024 2:50 pm
IDpilot wrote: Mon May 13, 2024 2:46 pm
Not sure I agree that "the funds holdings over the past 30 days" is used. From the instructions in Form N-1A it appears that the SEC Yield computation only takes into account those bonds held at close of business on the day before it is computed and is based on the price of those bonds on that date UNLESS the bond was purchased in the past thirty days in which case you use the purchase price of the bond.


I don't disagree with that at all. My words were a casual reference to the actual definition in N1-A. People can read the language involved and go from there following the twists and turns of the document. Are you the one who posted that reference before? If so, that is appreciated as it is the only way to figure out what is going on.
We had a great chat about SEC Yield in the Bond coupon question thread a couple of days ago. viewtopic.php?p=7851765#p7851765 I believe you actually were the first to post the N1-A instructions by a few minutes.

They are currently found in Form N-1A, effective December 11, 2023, pages 60-61 for those who are interested.
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Re: Bond Yields

Post by alex_686 »

artbuc wrote: Mon May 13, 2024 2:51 pm Wow, no wonder bond funds are so hard to understand. Something as simple as the 30 day SEC yield is subject to debate and disagreement among some very smart and experienced investors.
Having had to program this, it is way simpler than what you are making this out to be.

The SEC Yield is basically yield to maturity, adjusted a bit for any optionality.

The 30 day bit is a bit of smoothing. Yield is based on the value of the assets as marked-to-market. That is, on actual market prices. Actually market prices are kind of nosy. Yields can easily bounce around a few bps even in calm markets.

The distribution language is specific to money market funds and their particular mechanisms.
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exodusing
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Re: Bond Yields

Post by exodusing »

alex_686 wrote: Mon May 13, 2024 3:06 pm
artbuc wrote: Mon May 13, 2024 2:51 pm Wow, no wonder bond funds are so hard to understand. Something as simple as the 30 day SEC yield is subject to debate and disagreement among some very smart and experienced investors.
Having had to program this, it is way simpler than what you are making this out to be.

The SEC Yield is basically yield to maturity, adjusted a bit for any optionality.

The 30 day bit is a bit of smoothing. Yield is based on the value of the assets as marked-to-market. That is, on actual market prices. Actually market prices are kind of nosy. Yields can easily bounce around a few bps even in calm markets.
Exactly. For that matter, you could just say SEC yield is basically YTM.
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Re: Bond Yields

Post by metalworking »

exodusing wrote: Mon May 13, 2024 3:38 pm
alex_686 wrote: Mon May 13, 2024 3:06 pm
artbuc wrote: Mon May 13, 2024 2:51 pm Wow, no wonder bond funds are so hard to understand. Something as simple as the 30 day SEC yield is subject to debate and disagreement among some very smart and experienced investors.
Having had to program this, it is way simpler than what you are making this out to be.

The SEC Yield is basically yield to maturity, adjusted a bit for any optionality.

The 30 day bit is a bit of smoothing. Yield is based on the value of the assets as marked-to-market. That is, on actual market prices. Actually market prices are kind of nosy. Yields can easily bounce around a few bps even in calm markets.
Exactly. For that matter, you could just say SEC yield is basically YTM.
Since the YTM is based on fund duration is the SEC yield what you might expect to earn annualized over the funds 6 year duration? I think others have been saying it’s what the fund will earn over the next year.
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Re: Bond Yields

Post by alex_686 »

metalworking wrote: Mon May 13, 2024 4:14 pm Since the YTM is based on fund duration is the SEC yield what you might expect to earn annualized over the funds 6 year duration? I think others have been saying it’s what the fund will earn over the next year.
The SEC yields. Assuming that the portfolio and rates remain constant. And ignoring the roll-down effect, if there is any. etc. Really, you would be better off reading a yield curve.
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Beensabu
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Re: Bond Yields

Post by Beensabu »

IDpilot wrote: Mon May 13, 2024 2:48 pm Read the rest of the instructions from the SEC that I just posted on exactly how you compute "a" for debt obligations. Hint, it ain't based on the actual distributions for the past 30 days!
I just did, thanks.

So they determine interest earned over the past 30-day period by each fund holding by calculating YTM based on the prior day's market value of that holding (including actual accrued interest) instead of just using actual accrued interest? Got it.
exodusing wrote: Mon May 13, 2024 3:38 pm For that matter, you could just say SEC yield is basically YTM.
So what's the point of publishing a quarterly YTM then? Just as something to benchmark SEC yield against to see how much YTM has changed since X date?
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Re: Bond Yields

Post by alex_686 »

Beensabu wrote: Mon May 13, 2024 4:35 pm So what's the point of publishing a quarterly YTM then? Just as something to benchmark SEC yield against to see how much YTM has changed since X date?
YTM assumes no optionality. Basically that bonds will never be called. It is a simpler calculation than SEC Yield. It has been around longer.
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Beensabu
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Re: Bond Yields

Post by Beensabu »

alex_686 wrote: Mon May 13, 2024 5:19 pm
Beensabu wrote: Mon May 13, 2024 4:35 pm So what's the point of publishing a quarterly YTM then? Just as something to benchmark SEC yield against to see how much YTM has changed since X date?
YTM assumes no optionality. Basically that bonds will never be called. It is a simpler calculation than SEC Yield. It has been around longer.
Thanks.
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alex_686
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Re: Bond Yields

Post by alex_686 »

metalworking wrote: Mon May 13, 2024 1:00 pm Thanks and completely understand that. My understanding is people are saying that the SEC yield is the best indicator for annualized return over the next year. I believe my numbers support that it is not even close in my case without a large unpredictable change in NAV or else a big capital gain which the fund rarely distributes. I cant believe that no one else is seeing the same type of numbers I am. Maybe SEC yield only applies to newly purchased funds
A simplified example showing why your logic is a bit off base. Note, I may have made the same mistake before entering the world of fund accounting. SEC Yield is forward looking economic returns, distributions are backwards looking tax.

Day 1: I open a new mutual fund buying $100 5 year 3% coupon bond. SEC Yield would be 3%.

Day 2: Yields spike to 6%. The market reprices my bond to $85. At $85 and a 3% coupon my bond now yields 6%. Ergo my SEC Yield is now 6%.

Year 1 - taxes. I earn a $3 coupon income. I distribution that.

Year 1 - return: I earn a $3 coupon and, assuming rates are stable, my bond’s price will increase by $3. Note, no taxes here. I never bought or sold any bonds. I didn’t but the bond at a discount, so no discount to accrual. No taxable transaction, nothing to distribute.
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metalworking
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Re: Bond Yields

Post by metalworking »

alex_686 wrote: Mon May 13, 2024 6:31 pm
metalworking wrote: Mon May 13, 2024 1:00 pm Thanks and completely understand that. My understanding is people are saying that the SEC yield is the best indicator for annualized return over the next year. I believe my numbers support that it is not even close in my case without a large unpredictable change in NAV or else a big capital gain which the fund rarely distributes. I cant believe that no one else is seeing the same type of numbers I am. Maybe SEC yield only applies to newly purchased funds
A simplified example showing why your logic is a bit off base. Note, I may have made the same mistake before entering the world of fund accounting. SEC Yield is forward looking economic returns, distributions are backwards looking tax.

Day 1: I open a new mutual fund buying $100 5 year 3% coupon bond. SEC Yield would be 3%.

Day 2: Yields spike to 6%. The market reprices my bond to $85. At $85 and a 3% coupon my bond now yields 6%. Ergo my SEC Yield is now 6%.

Year 1 - taxes. I earn a $3 coupon income. I distribution that.

Year 1 - return: I earn a $3 coupon and, assuming rates are stable, my bond’s price will increase by $3. Note, no taxes here. I never bought or sold any bonds. I didn’t but the bond at a discount, so no discount to accrual. No taxable transaction, nothing to distribute.
Thanks for this. I am slowly starting to figure it out.
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Re: Bond Yields

Post by ruralavalon »

artbuc wrote: Mon May 13, 2024 1:43 pm Here is good discussion of SEC yield vs distribution yield.

https://investor.vanguard.com/investor- ... bond-funds

Yes, it makes sense to me. SEC yield is a 30 lagging snapshot. Everyone uses same calculation so it is useful tool to compare funds. I would not count on it as a predictor during current times of an activist Fed.
During "current times of an activist Fed" SEC Yield is still likely to be a better predictor of the future than last year's distribution yield.
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Re: Bond Yields

Post by alex_686 »

ruralavalon wrote: Tue May 14, 2024 9:52 am
artbuc wrote: Mon May 13, 2024 1:43 pm Here is good discussion of SEC yield vs distribution yield.

https://investor.vanguard.com/investor- ... bond-funds

Yes, it makes sense to me. SEC yield is a 30 lagging snapshot. Everyone uses same calculation so it is useful tool to compare funds. I would not count on it as a predictor during current times of an activist Fed.
During "current times of an activist Fed" SEC Yield is still likely to be a better predictor of the future than last year's distribution yield.
While the market might be distorted during this "current times of an activist Fed" (which I would contest a bit) the Fed is signaling it's intention. As such, while the yield curve may be "wrong" it still what the market expects bonds to earn in the next year.

Even if you don't buy it, the SEC Yield is a high quality indicator of expected returns. If you don't think it is I can show you how to make bets on how it is wrong. I don't think you think this. The better interpretation is that the Fed may make surprise announcements. With that you wouldn't change your market expectations, rather you would widen your error bars on those expectations. i.e., you would expect higher volatility. i.e., higher risk.
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HanSolo
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Re: Bond Fund Yields

Post by HanSolo »

artbuc wrote: Fri May 10, 2024 6:43 pm Stocks are easy to understand, we are simply looking at the change in stock price without consideration to dividends.
Huh? Many stocks pay dividends. VTSAX pays dividends. Not seeing why you think the stock situation is simpler.
On that page, click "Performance & fees". Then click "Annually". You'll see a table with columns "Capital return by NAV" (the share price change) and "Income return by NAV" (the yield). Then, "Total return by NAV" is the sum of the two.
artbuc wrote: Mon May 13, 2024 2:51 pm Wow, no wonder bond funds are so hard to understand.
If you look at the VTSAX page, you'll see the same sort of thing (same columns). Not seeing where the stock fund is simpler than the bond fund (as you asserted). It's the same kind of math on the page, and adds up the same way. If you can point to something on the page that shows that the stock fund is simpler (I mean something actually on the page, not in your imagination about it), then maybe I'll understand your meaning.
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alex_686
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Re: Bond Fund Yields

Post by alex_686 »

HanSolo wrote: Tue May 14, 2024 12:04 pm
artbuc wrote: Fri May 10, 2024 6:43 pm Stocks are easy to understand, we are simply looking at the change in stock price without consideration to dividends.
Huh? Many stocks pay dividends. VTSAX pays dividends. Not seeing why you think the stock situation is simpler.
Let me tackle this a slightly different way.

My day job is with bonds. I operate with a precision of 0.01%. The math behind the bonds is straightforward. I mean you can go really deep into the subject but maybe that is a different story. But the point is that it is math. There is a rigorous methodology. You must learn the rules.

Equities are different. I corrected statement would be that equities are expected to return 10% over the next 10 years, +/- 10%. There is much slop in the estimates and methods. Rigorous methodology isn’t going to improve results.
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Re: Bond Fund Yields

Post by HanSolo »

alex_686 wrote: Tue May 14, 2024 12:38 pm
HanSolo wrote: Tue May 14, 2024 12:04 pm
artbuc wrote: Fri May 10, 2024 6:43 pm Stocks are easy to understand, we are simply looking at the change in stock price without consideration to dividends.
Huh? Many stocks pay dividends. VTSAX pays dividends. Not seeing why you think the stock situation is simpler.
Let me tackle this a slightly different way.

My day job is with bonds. I operate with a precision of 0.01%. The math behind the bonds is straightforward. I mean you can go really deep into the subject but maybe that is a different story. But the point is that it is math. There is a rigorous methodology. You must learn the rules.
Sounds like we're in agreement, just that my comments were about stock and bond mutual funds. I think my assertions were accurate.

If we're talking about the underlying securities that are held in those funds, then yeah, I agree with you that bond prices (and outcomes, if held to maturity) are determined more by math than other factors, in comparison with stock prices (and outcomes).

I commented on that in previous threads:
HanSolo wrote: Sat Jan 20, 2024 12:36 pm Buffett said that when you buy a stock, price is what you pay and value is what you get. They're not necessarily the same (e.g., sometimes a stock is overvalued or undervalued). For one thing, sometimes price and value seemingly move in opposite directions (e.g., the company surprises to the upside and the price drops that day).

Bond prices are more about math, and stock prices are pretty much a nebulous combination of math and psychology. For a stock, you can look at the fundamentals (financial statements, etc.) and estimate a valuation, but then see that the actual current market price may be way off of that (such as due to subjective perceptions about the company).

So maybe that's why bonds seem more complicated than stocks: you can figure out what bonds are worth using math, but then you have to do the math. With stocks, you can't really figure out why the price is what it is, so then people don't do the math. And not doing math is simpler.
HanSolo wrote: Sun Jan 21, 2024 9:38 am To me, understanding the price of a business is more complicated than understanding the price of a bond. That's what makes bonds simpler than stocks.
HanSolo wrote: Thu Apr 25, 2024 4:46 pm Also, I'm not seeing why people are saying that bonds are "complex". OK, maybe all investing is complex, but bonds are less complex than stocks. Bonds actually tell you what they'll pay you, and stocks tell you absolutely nothing about that. The only way that knowing what a security pays is more complex than not knowing what a security pays is if you think not knowing anything is simpler than knowing something.
That being said, I think the OP had concerns about what happens with mutual funds rather than individual securities (like trying to understand the difference between yield figures and total return figures, as quoted for mutual funds).
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AceSD
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Re: Bond Yields

Post by AceSD »

This site has been SO helpful, but even with it, my abilities seem limited.

I just purchased $101,204.50 of TIPS on Schwab. Somehow, the moment after buying my brokerage shows I have a loss of $661.11. I have no idea how this loss works or how I could have lost 0.65% the moment I purchased this.

I am less worried about the $600 than I am about understanding how this is. Did I miss something when buying? Did rates make a big move in the moment I purchased? I REALLY want to love TIPS and buy all TIPS on my tax deferred...I just do not understand them as well as I should. It is unpleasant to buy a bond and immediately be told you lost 0.65%.

Relatedly, I am still down 0.11% on the same TIPS ($1,000 buy) I purchased last week. Someday they will both earn a positive return...I hope (and hopefully at their YTM of 2.046%).
muffins14
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Re: Bond Yields

Post by muffins14 »

AceSD wrote: Wed May 15, 2024 12:22 pm This site has been SO helpful, but even with it, my abilities seem limited.

I just purchased $101,204.50 of TIPS on Schwab. Somehow, the moment after buying my brokerage shows I have a loss of $661.11. I have no idea how this loss works or how I could have lost 0.65% the moment I purchased this.

I am less worried about the $600 than I am about understanding how this is. Did I miss something when buying? Did rates make a big move in the moment I purchased? I REALLY want to love TIPS and buy all TIPS on my tax deferred...I just do not understand them as well as I should. It is unpleasant to buy a bond and immediately be told you lost 0.65%.

Relatedly, I am still down 0.11% on the same TIPS ($1,000 buy) I purchased last week. Someday they will both earn a positive return...I hope (and hopefully at their YTM of 2.046%).
What do you mean by "just bought"? Exactly what time?
For example at open this morning, SCHP, the TIPS fund, was priced at $51.92. It was $51.84 around 10:10am, a loss of about 0.2%. Now is it up 0.56% for the day.

The market prices of bonds, like other investments, change constantly because the market is always setting auctions based on what people are willing to pay for the right to receive a stream of future cashflows.
Crom laughs at your Four Winds
BirdFood
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Re: Bond Yields

Post by BirdFood »

AceSD wrote: Wed May 15, 2024 12:22 pm This site has been SO helpful, but even with it, my abilities seem limited.

I just purchased $101,204.50 of TIPS on Schwab. Somehow, the moment after buying my brokerage shows I have a loss of $661.11. I have no idea how this loss works or how I could have lost 0.65% the moment I purchased this.

I am less worried about the $600 than I am about understanding how this is. Did I miss something when buying? Did rates make a big move in the moment I purchased? I REALLY want to love TIPS and buy all TIPS on my tax deferred...I just do not understand them as well as I should. It is unpleasant to buy a bond and immediately be told you lost 0.65%.

Relatedly, I am still down 0.11% on the same TIPS ($1,000 buy) I purchased last week. Someday they will both earn a positive return...I hope (and hopefully at their YTM of 2.046%).
For what it's worth, if you plan to hold them to maturity, the loss doesn't particularly matter. I happen to have some TIPS that are showing an increase in value, and I admit that it's nice :), but it doesn't matter, because I plan to hold them. I also have some T-Bills that are showing a loss; again, doesn't matter, because I plan to hold them.

Edited to add: Oh, I'm assuming you mean TIPS, not a TIPS fund.
AceSD
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Re: Bond Yields

Post by AceSD »

I do mean TIPS yes, NOT a fund.

I understand they can go down in value and it does not matter so long as I plan to hold to maturity, which I do.

BUT...how is it I lost $660 the moment I bought the TIPS bonds? Any guesses?
muffins14
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Re: Bond Yields

Post by muffins14 »

AceSD wrote: Wed May 15, 2024 12:32 pm I do mean TIPS yes, NOT a fund.

I understand they can go down in value and it does not matter so long as I plan to hold to maturity, which I do.

BUT...how is it I lost $660 the moment I bought the TIPS bonds? Any guesses?
As I mentioned, prices change througout the day. What time did you buy the TIPS? What was the maturity date?
Crom laughs at your Four Winds
AceSD
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Re: Bond Yields

Post by AceSD »

10:20 am PST

UST INFL IDX 2.125%04/29INFL INDEX DUE 04/15/29

Between the time I confirmed the purchase and the time it took to go to my summary page, I showed a loss of $661.11.


Open Date Quantity Price Cost/Share Market Value Cost Basis Gain/Loss $ Gain/Loss % Holding Period
05/15/2024 100000 $99.92188 $1.01 $100,543.39 $101,204.50 -$661.11 -0.65% Short Term


Maybe it is the cost of buying this with a coupon of 2.125%? I imagine it is not a real "loss" but something like this.
MikeG62
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Re: Bond Yields

Post by MikeG62 »

AceSD wrote: Wed May 15, 2024 4:11 pm 10:20 am PST

UST INFL IDX 2.125%04/29INFL INDEX DUE 04/15/29

Between the time I confirmed the purchase and the time it took to go to my summary page, I showed a loss of $661.11.


Open Date Quantity Price Cost/Share Market Value Cost Basis Gain/Loss $ Gain/Loss % Holding Period
05/15/2024 100000 $99.92188 $1.01 $100,543.39 $101,204.50 -$661.11 -0.65% Short Term


Maybe it is the cost of buying this with a coupon of 2.125%? I imagine it is not a real "loss" but something like this.
I’m thinking this is a bid/ask spread thing. The market value showing in your account being what you could sell it for.
Real Knowledge Comes Only From Experience
AceSD
Posts: 52
Joined: Tue Apr 09, 2024 12:49 pm

Re: Bond Yields

Post by AceSD »

Who knows...I figure if the folks here do not know...it is probably un-knowable. haha.
alex_686
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Re: Bond Yields

Post by alex_686 »

AceSD wrote: Thu May 16, 2024 9:32 am Who knows...I figure if the folks here do not know...it is probably un-knowable. haha.
No, it is very knowable. Or at least, it can be infered. If you had access to a pricing service you could pull the raw data. Bid/Ask is the place to start. Also, most bonds trade Over-The-Counter. As such, the "commission" is built into the price.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
RyeBourbon
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Re: Bond Yields

Post by RyeBourbon »

AceSD wrote: Wed May 15, 2024 4:11 pm 10:20 am PST

UST INFL IDX 2.125%04/29INFL INDEX DUE 04/15/29

Between the time I confirmed the purchase and the time it took to go to my summary page, I showed a loss of $661.11.


Open Date Quantity Price Cost/Share Market Value Cost Basis Gain/Loss $ Gain/Loss % Holding Period
05/15/2024 100000 $99.92188 $1.01 $100,543.39 $101,204.50 -$661.11 -0.65% Short Term


Maybe it is the cost of buying this with a coupon of 2.125%? I imagine it is not a real "loss" but something like this.
Look today. I see the third-party price is now over 100.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 70/0/30
AceSD
Posts: 52
Joined: Tue Apr 09, 2024 12:49 pm

Re: Bond Yields

Post by AceSD »

Today the loss total is 65.86.

I mean, I like that more than -661, but I still do not understand it.

I am pretty confident the $661 "loss" is not real...or I would just give up on TIPS. In the end, I really only care that I am getting the stated YTM, but I suppose I won't be able to check that for about 5 years.

When I click on "Cost/Basis" this comes up (market value and cost basis have changed).


To put in one place, when I purchased, this was the information provided:
Open Date Quantity Price Cost/Share Market Value Cost Basis Gain/Loss $ Gain/Loss % Holding Period
05/15/2024 100000 $99.92188 $1.01 $100,543.39 $101,204.50 -$661.11 -0.65% Short Term

The next day (today), this is provided:
Open Date Quantity Price Cost/Share Market Value Cost Basis Gain/Loss $ Gain/Loss % Holding Period
05/15/2024 100000 $100.3125 $101.02 $100,957.50 $101,023.36 -$65.86 -0.07% Short Term
Last edited by AceSD on Thu May 16, 2024 10:23 am, edited 6 times in total.
RyeBourbon
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Re: Bond Yields

Post by RyeBourbon »

AceSD wrote: Thu May 16, 2024 10:11 am Today the loss total is 63.00.

I mean, I like that more than -661, but I still do not understand it.

I am pretty confident the $661 "loss" is not real...or I would just give up on TIPS. In the end, I really only care that I am getting the stated YTM, but I suppose I won't be able to check that for about 5 years.

Interestingly, the "Cost/Basis" TODAY states $102,030.08, an increase of $825.58 from yesterday. Not sure why this would change at all.

Open Date Quantity Price Cost/Share Market Value Cost Basis Gain/Loss $ Gain/Loss % Holding Period
05/15/2024 100000 $100.3125 $101.02 $100,957.50 $101,023.36 -$65.86 -0.07% Short Term
Very strange. I own my TIPS at Fidelity, so I can't really comment on how Schwab does things.

ETA: I looked at the cost basis of my TIPS on Fidelity and it looks like they adjust them daily for the CPI factor. I guess Schwab does the same. This way the gain or loss is only the market gain or loss and doesn't include inflation. I never really paid attention to it because I'm holding until maturity so I just ignore the gains/losses.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 70/0/30
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