Super Short Term Bond Risks

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Riley15
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Super Short Term Bond Risks

Post by Riley15 » Mon Jan 14, 2019 12:03 pm

The Vanguard Ultra Short Term Bond (VUBFX) seems like a great place to park short term funds. It has a SEC yield of 2.71% and a duration of only 0.9 years so the interest rate risk seems minimal.

However I am trying to understand the credit risk. Ultra Short Term Bond (VUBFX) seems very different from the regular Short Term Bond (VBISX). VBISX is 65% Treasuries while VUBFX has none. It's 43% Asset-Backed?

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

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

I am not sure what Asset-Backed bonds really are and their risk profile?

The Ultra Short fund looks like it should be very low risk but investor grade funds usually has good mix of treasuries for safety. It seems to me they might be taking a much bigger credit risk to improve yield.

So VUBFX (Ultra Short Term Bond) might essentially be more risky than VBISX (Short Term Bond) when it comes to credit risk. Curious what others think?
Last edited by Riley15 on Mon Jan 14, 2019 2:25 pm, edited 2 times in total.

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Tycoon
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Re: Super Short Term Bond Risks

Post by Tycoon » Mon Jan 14, 2019 1:43 pm

If risk is a concern consider treasuries or CD's. The small delta in return won't be noticed and you'll sleep better at night.
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Re: Super Short Term Bond Risks

Post by alex_686 » Mon Jan 14, 2019 1:46 pm

Riley15 wrote:
Mon Jan 14, 2019 12:03 pm
I am not sure what Asset-Backed bonds really are and their risk profile?
Asset backed bonds are pooled instruments of other smaller loans. Car loans, HELOC, credit card debit, trailer homes, etc. The are like Mortgage Backed Securities (MBS), but not. They tend to be safe. Rarely does something like 2008 happen. And I mean this seriously - in the history of asset backed bonds, 2008 is the one case where they really melted down.

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Re: Super Short Term Bond Risks

Post by mouth » Mon Jan 14, 2019 2:36 pm

is it just me or is the after-tax performance pretty bad?

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Re: Super Short Term Bond Risks

Post by megabad » Mon Jan 14, 2019 3:10 pm

Riley15 wrote:
Mon Jan 14, 2019 12:03 pm
So VUBFX (Ultra Short Term Bond) might essentially be more risky than VBISX (Short Term Bond) when it comes to credit risk.
Yes, it is. This is the primary reason Ultrashort is at roughly the same SEC yield as Short Term despite a duration that is almost 2 years less. You will have to decide whether this additional credit risk that comes along with asset backed, industrial debt, foreign debt, etc is better or worse that a longer term higher quality bond fund (with increased interest rate risk).

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Re: Super Short Term Bond Risks

Post by grabiner » Mon Jan 14, 2019 4:50 pm

mouth wrote:
Mon Jan 14, 2019 2:36 pm
is it just me or is the after-tax performance pretty bad?
The published after-tax numbers assume an investor in the highest (37%) federal tax bracket. Such an investor should not be holding any taxable bonds in a taxable account, as 37% of the returns will be lost to taxes; he or she should either hold taxable bond funds in an IRA, or municipal bond funds in a taxable account. (CDs would have the same problem.) In a 22% or lower tax bracket, it's probably better to hold taxable bonds even if you must hold bonds in your taxable account.

Vanguard's municipal alternative is Short-Term Tax-Exempt, which has a one-year duration.
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robertmcd
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Re: Super Short Term Bond Risks

Post by robertmcd » Mon Jan 14, 2019 4:53 pm

Worth looking into ICSH, JPST, GSY as well. Look at their performance during this recent move in Nov/Dec to see if the credit risk showed up.

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Re: Super Short Term Bond Risks

Post by EddyB » Mon Jan 14, 2019 4:58 pm

grabiner wrote:
Mon Jan 14, 2019 4:50 pm
mouth wrote:
Mon Jan 14, 2019 2:36 pm
is it just me or is the after-tax performance pretty bad?
The published after-tax numbers assume an investor in the highest (37%) federal tax bracket. Such an investor should not be holding any taxable bonds in a taxable account, as 37% of the returns will be lost to taxes; he or she should either hold taxable bond funds in an IRA, or municipal bond funds in a taxable account. (CDs would have the same problem.) In a 22% or lower tax bracket, it's probably better to hold taxable bonds even if you must hold bonds in your taxable account.

Vanguard's municipal alternative is Short-Term Tax-Exempt, which has a one-year duration.
I keep my "emergency fund" in treasury money market and short-term bond funds. The after-tax return is almost exactly the same as my best available muni options, but at lower risk. I'm certainly aware of the tax effect, but it's not the only consideration.

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Re: Super Short Term Bond Risks

Post by mouth » Mon Jan 14, 2019 5:06 pm

grabiner wrote:
Mon Jan 14, 2019 4:50 pm
mouth wrote:
Mon Jan 14, 2019 2:36 pm
is it just me or is the after-tax performance pretty bad?
The published after-tax numbers assume an investor in the highest (37%) federal tax bracket. Such an investor should not be holding any taxable bonds in a taxable account, as 37% of the returns will be lost to taxes; he or she should either hold taxable bond funds in an IRA, or municipal bond funds in a taxable account. (CDs would have the same problem.) In a 22% or lower tax bracket, it's probably better to hold taxable bonds even if you must hold bonds in your taxable account.

Vanguard's municipal alternative is Short-Term Tax-Exempt, which has a one-year duration.
[sigh] Yeah I know. I'm in the 32% + 5.75% bracket and you nailed it on the muni's for me. I just have my eye out and was surprised just how bad it was. Oh well.

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Re: Super Short Term Bond Risks

Post by robertmcd » Mon Jan 14, 2019 5:45 pm

Also in the event of a liquidity crunch or bear market, these funds will likely lose money and/or trade with larger spreads. I think these funds are equivalent to picking up pennies in front of a steamroller, and shouldn't be counted on to rebalance into stocks like you can with an all treasury fund like SHV, BIL, GBIL, CLTL (ultrashort <1 yr) or SCHO, VGSH (short term 1-3 yrs).

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Re: Super Short Term Bond Risks

Post by goodenyou » Mon Jan 14, 2019 5:59 pm

Is the spread of tax-adjusted returns between an ultra short bond fund and the Prime Money Market fund (VMMXX) worth it, even at the highest marginal rate? If you factor the zero chance of NAV fluctuation in VMMXX, what is the premium differential that you believe is worth the added risk? Is this long term money or relatively short? How much money are we talking about?
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Re: Super Short Term Bond Risks

Post by asset_chaos » Mon Jan 14, 2019 6:48 pm

Riley15 wrote:
Mon Jan 14, 2019 12:03 pm
However I am trying to understand the credit risk. Ultra Short Term Bond (VUBFX) seems very different from the regular Short Term Bond (VBISX). VBISX is 65% Treasuries while VUBFX has none. It's 43% Asset-Backed?

So VUBFX (Ultra Short Term Bond) might essentially be more risky than VBISX (Short Term Bond) when it comes to credit risk. Curious what others think?
Morningstar says VUBFX has average credit quality of A and VBISX has AA. So, yes VUBFX has more credit risk than VBISX; however, average credit quality of A is still investment grade and the probability of losses from defaults or rising credit spreads are only slightly higher than for AA. Nonetheless, if you're parking short term funds and might want to spend them at a moment's notice, you might well be better off with an investment with a more stable value, like a money market or staggered CDs.
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Re: Super Short Term Bond Risks

Post by goodenyou » Mon Jan 14, 2019 7:44 pm

VWSUX (Short Term Tax-Exempt) has a yield of 186 basis points with a 52 week range of NAV 0.45%

VUSFX (Ultra Short Term) has a yield of 281 basis points with a 52 week range of NAV 0.35%

VBIRX (Short Term) has a yield of 287 basis points with a 52 week range of NAV 1.67%

VMMXX (Prime Money Market) has a yield of 245 basis points with no fluctuation of NAV.


Which would you choose?
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Riley15
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Re: Super Short Term Bond Risks

Post by Riley15 » Mon Jan 14, 2019 11:45 pm

goodenyou wrote:
Mon Jan 14, 2019 7:44 pm
Is the spread of tax-adjusted returns between an ultra short bond fund and the Prime Money Market fund (VMMXX) worth it, even at the highest marginal rate? If you factor the zero chance of NAV fluctuation in VMMXX, what is the premium differential that you believe is worth the added risk? Is this long term money or relatively short? How much money are we talking about?
The yield difference between Prime Money Markey (VMMXX) is 2.45% vs Ultra Short Term Bond (VUSFX) at 2.81% so that's a difference of 0.36%. I think that's pretty significant, I would pay about the same tax on both. This would be part of fixed income ladder.
goodenyou wrote:
Mon Jan 14, 2019 7:44 pm
VWSUX (Short Term Tax-Exempt) has a yield of 186 basis points with a 52 week range of NAV 0.45%

VUSFX (Ultra Short Term) has a yield of 281 basis points with a 52 week range of NAV 0.35%

VBIRX (Short Term) has a yield of 287 basis points with a 52 week range of NAV 1.67%

VMMXX (Prime Money Market) has a yield of 245 basis points with no fluctuation of NAV.


Which would you choose?
Just looking at this information alone, VUSFX wins even adjusted for maximum fluctuation. But the fluctuation is only based till 2015 so that credit risk has never really shown up.

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Re: Super Short Term Bond Risks

Post by goodenyou » Tue Jan 15, 2019 12:01 am

Riley15 wrote:
Mon Jan 14, 2019 11:45 pm
goodenyou wrote:
Mon Jan 14, 2019 7:44 pm
Is the spread of tax-adjusted returns between an ultra short bond fund and the Prime Money Market fund (VMMXX) worth it, even at the highest marginal rate? If you factor the zero chance of NAV fluctuation in VMMXX, what is the premium differential that you believe is worth the added risk? Is this long term money or relatively short? How much money are we talking about?
The yield difference between Prime Money Markey (VMMXX) is 2.45% vs Ultra Short Term Bond (VUSFX) at 2.81% so that's a difference of 0.36%. I think that's pretty significant, I would pay about the same tax on both. This would be part of fixed income ladder.
goodenyou wrote:
Mon Jan 14, 2019 7:44 pm
VWSUX (Short Term Tax-Exempt) has a yield of 186 basis points with a 52 week range of NAV 0.45%

VUSFX (Ultra Short Term) has a yield of 281 basis points with a 52 week range of NAV 0.35%

VBIRX (Short Term) has a yield of 287 basis points with a 52 week range of NAV 1.67%

VMMXX (Prime Money Market) has a yield of 245 basis points with no fluctuation of NAV.


Which would you choose?
Just looking at this information alone, VUSFX wins even adjusted for maximum fluctuation. But the fluctuation is only based till 2015 so that credit risk has never really shown up.
I’m not going to argue with you, but $360 per year per $100,000 invested just doesn’t do it for me. I would opt for zero chance of fluctuations with that little benefit.

I might opt for a 3 year CD @ 3% as an alternative. At least you get FDIC insurance for whatever that is worth (hopefully not ever needed). An extra $550/year (less taxes for both) to tie up your money for 3 years.
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Re: Super Short Term Bond Risks

Post by Valuethinker » Tue Jan 15, 2019 11:35 am

alex_686 wrote:
Mon Jan 14, 2019 1:46 pm
Riley15 wrote:
Mon Jan 14, 2019 12:03 pm
I am not sure what Asset-Backed bonds really are and their risk profile?
Asset backed bonds are pooled instruments of other smaller loans. Car loans, HELOC, credit card debit, trailer homes, etc. The are like Mortgage Backed Securities (MBS), but not. They tend to be safe. Rarely does something like 2008 happen. And I mean this seriously - in the history of asset backed bonds, 2008 is the one case where they really melted down.
And this is where it gets tricky - past patterns may not be a good guide to future outcomes.

Certain parts of the US market look really in trouble. Corporate leveraged loans in particular (probably not a factor here - they would have been sold to CLO funds?). But securitized car finance is one of those areas that have been flagged a number of times for risk - the amount being lent, the average term (longer than the average time of ownership) and various other subprime like characteristics. The underlying assets depreciate quite quickly so if there is default by a borrower, recoveries will be lower than housing.

Consumer debt has rebounded since the 2008 Crash.

It may be that the circumstances of 2008 were unique and we should not expect the problems to reoccur. Particularly in light of presumed tighter regulation. But there are at least some similarities.

My own thought is the next financial crisis is in Europe - Italian banks + possibly Deutsche Bank.

However the US consumer finance thing is worth keeping an eye on.

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Re: Super Short Term Bond Risks

Post by Doc » Tue Jan 15, 2019 1:19 pm

Riley15 wrote:
Mon Jan 14, 2019 12:03 pm
The Vanguard Ultra Short Term Bond (VUBFX) seems like a great place to park short term funds. It has a SEC yield of 2.71% and a duration of only 0.9 years so the interest rate risk seems minimal.
1) Be careful with SEC 30 day yields that include December. Depending on whether a fund accrues dividends daily or not the 30 day period may include two dividends which can distort the number.

2) Look at a price chart. Since interest rates have been changing rapidly lately keep the period short. Over the last three years the short term bond fund has had a price swing of some 3% compared to a few basis points for the ultrashort.

http://quotes.morningstar.com/chart/fun ... 0DEP%22%7D

3) I've been using the ultrashort fond instead of a MM fund for a couple of years. I look at rolling 3 month returns of alternatives. (Change the reference chart above from price to 3 month rolling return.) The short term fund looks really good for the last 3 months but is this due to a distorted dividend period?

FWIW we do not have an emergency fund.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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