Bond Funds? Question about Rational Investing

[FIRE'd@51]

It looks like we need Saluki to run numbers showing the variations of expected coupon rates vs inflation rates over 10%. Since TIPS are new (aren't they?) there won't be historic coupon rates but they could probably be projected backwards by matching the ones we have against a bond index??

TIPS have been around since 1997, IIRC. The first auctions were for 10 and 30-year TIPS. The first 5-year TIPS auction was October 2004 (see my post above). Prior to TIPS there really was no way to know what real interest rate expectations or inflation expectatations really were. Now you can extract a number for market expectations of inflation by comparing the yield on a TIPS with the yield on a regular Treasury note or bond of the same maturity; and real rate expectations from the YTM of TIPS. Currently the YTM's on 5-year TIPS and 5-year Treasury notes are 2.65% and 4.76%, respectively, so from this one can infer that the market is expecting inflation of about 2.1% per year for the next 5 years. See

http://www.bloomberg.com/markets/rates/index.html

for these data and also data for other maturities. From the past TIPS data we have, coupons on 5-year TIPs have ranged from 0.875% to 2.375%. If you look at coupons on longer dated TIPS from previous auctions you will see that they have ranged from 1.625% to 4.25%. For coupons on past auctions see:

http://www.treasurydirect.gov/instit/annceresult/tipscpi/tipscpi.htm

From this you can see that the market's expectation for real interest rates jumps all over the lot. This is why, as Brewer pointed out in an earlier post, TIPS can exhibit greater price volatility than conventional bonds. The duration with respect to real interest rates of a 30-year TIPS with a coupon of 2.5% is about 20.

 

[saluki9]

It looks like we need Saluki to run numbers showing the variations of expected coupon rates vs inflation rates over 10%. Since TIPS are new (aren't they?) there won't be historic coupon rates but they could probably be projected backwards by matching the ones we have against a bond index??

Well, there isn't any data out there for "expected coupon rates" but what I did was run a portfolio composed 100% of the Lehman 1-10 US Govt credit index and subtracted the return of the CPI-U

from 1/1976 until 9/06 the net "real" return was 2.92 or about 25bps higher than the expected real return on the 5 year TIPS being auctioned next week.

at least I thought it was interesting.

 

[wabmester]

Well, there isn't any data out there for "expected coupon rates" but what I did was run a portfolio composed 100% of the Lehman 1-10 US Govt credit index and subtracted the return of the CPI-U

from 1/1976 until 9/06 the net "real" return was 2.92 or about 25bps higher than the expected real return on the 5 year TIPS being auctioned next week.

at least I thought it was interesting.

What I find interesting is that your number is so much higher than what these guys get:

Edit: nevermind. While they give you the chart for 30 years, they give you the average over 50 years. It looks like those outrageous bond yields from the 80's throws the 30-year average off a bit.

 

[saluki9]

Edit: nevermind. While they give you the chart for 30 years, they give you the average over 50 years. It looks like those outrageous bond yields from the 80's throws the 30-year average off a bit.

As you could probably guess, this is a really boring weekend for me. So I broke it out by decades

1973 - 79 the real return was (2.62)

1980 - 1989 6.32

1990 - 1999 4.04

2000 - 9/2006 2.17

Now, I could use a different index and go back to 1926 but I don't think that would be too relevant.

 

[mathjak107]

just for info heres some returns for various fidelity bond funds ytd.

inflation proof securities -.07

us bond index 2.80

total bond index 3.38

intermediate treasuries .06

long term treasuries 0


3 of my favorites which i utilize

strategic income 5.51

new market income 8.77

floating rate loans 4.8


and for comparison cash reserves money market ytd 3.45

 

[saluki9]

and for comparison cash reserves money market ytd 3.45

Wow, they are raping you on the MMF

 

[mathjak107]

nooooo thats year to date. they are at 5% right now . ytd is right where most funds are.

vanguard prime is 3.82 and the fidelity figure was only up tp sept 30th, as i took it off my newsletter. the vanguard is right up to current moment

 

[saluki9]

nooooo thats year to date. they are at 5% right now . ytd is right where most funds are.

vanguard prime is 3.82 and the fidelity figure was only up tp sept 30th, as i took it off my newsletter. the vanguard is right up to current moment

My bad, I was thinking current yield

 

[JohnEyles]

Any opinions about MMBFX (MFS Muni Bond fund) ?

I got a BUNCH that a full-service advisor sold me (with 5% load)
by DCA during my more naive days in the 90s.

Seems to be yielding 4.86% with YTD rtn of 3.44%. This seems
pretty darn good given that it's tax-free.

Is there a good alternate you might prefer ? I can change it out
easily 'cause there's no capgain (or loss) to speak of, because the
substantial yield has all been DRIP'ed - and the frontend load is
water under the bridge !

 

[ats5g]

Any opinions about MMBFX (MFS Muni Bond fund) ?

I got a BUNCH that a full-service advisor sold me (with 5% load)
by DCA during my more naive days in the 90s.

Seems to be yielding 4.86% with YTD rtn of 3.44%. This seems
pretty darn good given that it's tax-free.

Is there a good alternate you might prefer ? I can change it out
easily 'cause there's no capgain (or loss) to speak of, because the
substantial yield has all been DRIP'ed - and the frontend load is
water under the bridge !

John,

Instead of MMBFX, you could go with Vanguard's Long-Term Tax-Exempt [VWLTX] or Insured Long-Trm T/E [VILPX]. All three have similar durations and credit qualities, plus Vanguard's expenses are around 0.15%. Interestingly, all three are "long term bond funds" but their durations are only around 6 years, which is usually in the intermediate term range.

If you wanted a strictly intermediate term muni fund, you could look at Vanguard's Interm-Term Tax-Ex [VWITX]. Same credit quality and low expense ratio, but a slightly lower duration, at 4.9 years.

TIAA-CREF and Fidelity also have national long term muni funds, but at slightly higher expense ratios.

I'm surprised that your broker actually sold you a not-so-sh*ty fund.

- Alec

 

[JohnEyles]

I'm surprised that your broker actually sold you a not-so-sh*ty fund.

She sold me loaded funds (duh) but all very good ones I think. In addition to
these, a bunch of American Funds, which have done quite well. At least she
got me regularly investing - that was worth the loads I paid. But I'm ready to
move on, thanks in no small part to what I'm learning here (thanks).

 

[FinanceDude]

She sold me loaded funds (duh) but all very good ones I think. In addition to
these, a bunch of American Funds, which have done quite well. At least she
got me regularly investing - that was worth the loads I paid. But I'm ready to
move on, thanks in no small part to what I'm learning here (thanks).

So she made you money, and you're moving on? Interesting..........

 

[JohnEyles]

She sold me loaded funds (duh) but all very good ones I think. In addition to
these, a bunch of American Funds, which have done quite well. At least she
got me regularly investing - that was worth the loads I paid. But I'm ready to
move on, thanks in no small part to what I'm learning here (thanks).

So she made you money, and you're moving on? Interesting..........

I'm an ungrateful bastard.

She also leaned on me hard and sold me a variable-life insurance policy
(a healthy single childless 40yo).

 

[saluki9]

Any opinions about MMBFX (MFS Muni Bond fund) ?

I got a BUNCH that a full-service advisor sold me (with 5% load)
by DCA during my more naive days in the 90s.

Seems to be yielding 4.86% with YTD rtn of 3.44%. This seems
pretty darn good given that it's tax-free.

Is there a good alternate you might prefer ? I can change it out
easily 'cause there's no capgain (or loss) to speak of, because the
substantial yield has all been DRIP'ed - and the frontend load is
water under the bridge !

I would keep the fund. For a broker sold fund the expenses are very low. In addition, despite its higher fees they have outperformed the comparable vanguard offerings.

 

[samclem]

So she made you money, and you're moving on? Interesting..........

I'm an ungrateful bastard.

She also leaned on me hard and sold me a variable-life insurance policy
(a healthy single childless 40yo).

Definitely a good move. She'll be sorrry to see you go--you'll probably get calls.

 

[brewer12345]

She also leaned on me hard and sold me a variable-life insurance policy
(a healthy single childless 40yo).

That's grounds for sending her to the firing squad right there.

 

[ats5g]

Not to throw Saluki under the bus, , but unless I'm missing something, MMBFX has trailed both VWLTX and VILPX in virtually every time period.

- Alec

 

[saluki9]

Not to throw Saluki under the bus, , but unless I'm missing something, MMBFX has trailed both VWLTX and VILPX in virtually every time period.

- Alec

Hey, thats fine, throw me under the bus. Hell, if you look back a couple pages I mistook YTD returns for current yield!


I'm showing the MFS fund about 16bps ahead of VWLTX YTD according to the folks at M*

Portfolio wise, these four funds are different animals. The MFS fund has around 9% of its holdings in the BBB range where the vanguard funds keep it all in AA or AAA. There are some differences with avg maturity and duration between the four funds too.

I should restate my prior comments to say the following. This fund isn't a total dog. If you like it you shouldn't get rid of it just for the hell of it. That being said, you can lessen your chances of underperformance by choosing a lower cost fund.

(Edited to add that the MFS fund has a lower standard deviation by about 20-30% compared to the Vanguard funds)

 

[JohnEyles]

I would keep the fund [MMBFX]. For a broker sold fund the expenses are very low. In addition, despite its higher fees they have outperformed the comparable vanguard offerings.

Hmm, looks like VWLTX has somewhat higher YTD return if not somewhat lower
current yield. Oh well, too late now - honestly, one reason I wanted to ditch
MMBFX is that the "basis history" is VERY complex, and I kinda want to try to
leave that behind instead of trying to figure it out in my dottering years (yeah,
in theory I can figure it out now and save the info).

 

[FinanceDude]

That's grounds for sending her to the firing squad right there.

Maybe not, if he's making $500,000 or more a year, and has "run out" of tax-deferred investing options...........

 

[brewer12345]

Maybe not, if he's making $500,000 or more a year, and has "run out" of tax-deferred investing options...........

Not even then. VULs are such a ripoff that the hypothetical mark investor would be better off with a tax managed or regular index fund.

 

[haha]

She also leaned on me hard and sold me a variable-life insurance policy
(a healthy single childless 40yo).

From your description of her I guess I would let her lean on me too. But maybe I would demur on the variable-life, and just follow up on the leaning part.

Ha

 

[FinanceDude]

From your description of her I guess I would let her lean on me too. But maybe I would demur on the variable-life, and just follow up on the leaning part.

Ha

So, she was a "looker"

 

[JohnEyles]

So, she was a "looker"

No. Where are you guys getting this ?

And I don't make over $500K either ...

 

[FinanceDude]

No. Where are you guys getting this ?

And I don't make over $500K either ...

Ok............