Bonds - Short Term or Longer

[kannon]

Morning All -

We have accumulated funds in non-IRA Vanguards Short Term Bond Fund (VFSUX).

Read an article in Money Dec edition suggesting that with expected interest rate small change, better to go to Intermediate Term.

We have enough liquidity in other accounts to whether storms over next 3-5 yrs so this money is more longer term.

I guess I may be answering my own questions if we should go from ST to IT. As long as we have enough liquidity then better to go IT.

If we do go IT, better to go Vanguard IT (VBILX 7.2 yrs avg maturity) or Vanguard Total Bond (VBTLX - 5.5 ys avg maturity)

Would appreciate your thoughts. This forum has amazing amount of knowledge and insight.

Thanks!!

Kannon

 

[2017ish]

It is all speculation as to when and how much interest rates will go up. 7.2 avg. maturity would suffer more of a hit than 5.5 if rates go up. So, how long will it be and how big of an increase, versus the difference in yield (I assume VBILX yields better than VBTLX).

I personally am flaunting the core tenet of indexing by staying in VFSUX on the expectation that rates have just gotta go up soon--but people have been thinking that for quite a while now.... Then again, the VFSUX money is not merely ballast for me, since it also is my emergency fund, so my answer is likely different than yours.

 

[FIREd]

I have 3 core bond funds in my portfolio: one intermediate-term total bond market fund (a de facto treasury bond fund nowadays), one intermediate-term corporate bond fund, and one intermediate-term municipal bond fund. I think that intermediate-term bonds provide a good balance between current income and interest rate risk.

 

[daylatedollarshort]

For our portfolio, I am seeing a lot more potential downside in long term bond funds than possible upside - there isn't a lot of room for rates to decrease and a whole lot they could go up. So I am sticking more to an assortment of short terms funds, international funds, floating rate and ladders (rolling averages), getting back to the old bond funds never mature school of thought. But I don't have a crystal ball - that is just the course we've decided on.

 

[audreyh1]

I have 3 core bond funds in my portfolio: one intermediate-term total bond market fund (a de facto treasury bond fund nowadays), one intermediate-term corporate bond fund, and one intermediate-term municipal bond fund. I think that intermediate-term bonds provide a good balance between current income and interest rate risk.

Agreed. IMO there is more interest rate risk at the shortest end.

We have 5% cash, 5% short-term high quality bond fund, and 37% in a MX of intermediate bond funds.

 

[Midpack]

We're straddling the fence at 19% VBTLX (5.5 yr duration) and 15% VFSUX (2.4 yr duration), all tax deferred. We don't plan to even begin to touch those funds for 10-12 years, so I'd be perfectly happy (and probably ahead on total return) to further increase our intermediate bond funds and reduce short term. Currently under consideration.

 

[OrcasIslandBound]

We believe that the interest rates will likely stay flat for years, just as they have in Japan. Our bonds, which are 56% of our portfolio are about 2/3 in intermediate BND, and 1/3 in long term BLV. BLV earns 50% more interest. We'll let you all know in a few years if this was a good call.

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[Sunset]

I have a small amount in ST Vanguard bond fund, and frankly it has been disappointing, as it has gone down in value, which has been roughly offset by the dividends paid.
I could have just left it as cash for the same value and much safer !

I had thought a short term one was best, but now assuming rates rise 0.5% in 2015, something else might be better, and I'm open to suggestions.

 

[audreyh1]

I have a small amount in ST Vanguard bond fund, and frankly it has been disappointing, as it has gone down in value, which has been roughly offset by the dividends paid.
I could have just left it as cash for the same value and much safer !

I had thought a short term one was best, but now assuming rates rise 0.5% in 2015, something else might be better, and I'm open to suggestions.

Which ST Vanguard bond fund?

Are you looking at just year to date? or over the past year?

Short-term bond funds may have not gone up much over the past year as they yield so little, but at least over the past year they have generally outperformed cash. As their yield keeps dropping, at some point cash may be a better choice, but I don't think that's been true recently.

Unless you are talking about one with lower credit quality.

IMO, at worst, we're looking at 0.25% interest rate increase per year for the next 5 years. But it could be much slower, stall, rates drop again, only short-term affect with 10 year not budging, etc. We just don't know.

Since I'm holding my fixed income for decades, I'm quite comfortable holding intermediate-term bonds. If they drop a little for a couple of years due to interest rates rising quickly, I'll be rebalancing into them from cash and stocks. Since 2000 intermediate bonds returns have been positive even during periods of rising rates, another reason I don't worry overmuch about it.

 

[WannabeRetired]

Hmm. Maybe it's not so bad that I don't own any bonds right now and have a 5-year CD instead?

 

[2017ish]

Hmm. Maybe it's not so bad that I don't own any bonds right now and have a 5-year CD instead?

Depending upon the rate on that CD, it might be better than "not so bad." [Un]fortunately [??] we failed to diversify into any bonds until 2 years ago--and our only CD purchase was in the 1980s.... Thus, I missed the boat on recent good CD rates, I think.

 

[audreyh1]

Hmm. Maybe it's not so bad that I don't own any bonds right now and have a 5-year CD instead?

If your 5 year CD is paying you 3%, you are sitting pretty. Intermediate bond funds aren't yielding that much any longer. SEC yields for core-type diversified intermediate bond funds have dropped below 2.5%. Short-term index bond funds below 1%, although their trailing yield is still above 1% making them still slightly higher than FDIC insured high-yield savings accounts.

 

[pb4uski]

The Vanguard Short Term Bond that yields ~.9% but has a duration of 2.7. I would favor an online savings account since they have about the same yield (mine is .9% but there are some a bit higher), no credit risk (FDIC insured) and no interest rate risk (no decline in value if rates increase).

 

[WannabeRetired]

I'm getting 2.20% for the next 49 months on the CD. I've got a little bit of liquid cash in a money market and the rest is in equities. Equities to CD/cash split right now is 76/24.

Toying with the idea of just doing CD ladders at this point. Current 5-year rates are 2.30% at my credit union. I missed the 3% rates from last year.

EDIT: I welcome any comments (as long as I'm not hijacking the thread too much).

 

[audreyh1]

The Vanguard Short Term Bond that yields ~.9% but has a duration of 2.7. I would favor an online savings account since they have about the same yield (mine is .9% but there are some a bit higher), no credit risk (FDIC insured) and no interest rate risk (no decline in value if rates increase).

I haven't sold my VBISX which has an SEC yield of 0.82%, but it's actually paying me 1.14% a month to own it (the distribution yield), which is still better than most savings accounts.

But there is a bigger reason I hold this fund beyond yield - it is there for times of stress. It appreciates when everything else goes to hell, especially stocks and lower quality bonds, so I'm keeping it. I hold some cash too - but cash doesn't appreciate when there is a rush to quality.

 

[audreyh1]

I'm getting 2.20% for the next 49 months on the CD. I've got a little bit of liquid cash in a money market and the rest is in equities. Equities to CD/cash split right now is 76/24.

Toying with the idea of just doing CD ladders at this point. Current 5-year rates are 2.30% at my credit union. I missed the 3% rates from last year.

EDIT: I welcome any comments (as long as I'm not hijacking the thread too much).

2.3% is probably just about right to keep buying them instead of intermediate bond funds. Intermediate bond funds appreciated quite a bit last year, which is why their yields have dropped so much now.

 

[Sunset]

I had to go and grab my numbers, so maybe things are not quite as bad as I thought.

I hold VCSH : Vanguard Short-Term Corporate Bond Index Fund ETF

Bought it at $80.27 right now its $79.91 per share
But it has paid out over an 11 month period the annual rate of 1.8% dividends
I have this in an IRA so can ignore the "fake" capital gain statements. (in a taxable account I would add this to the basis and the loss would be larger).

Subtracting the real decrease in value from the dividends give me a annual rate of 1.36%
Had this been in a taxable account, my rate would be 1.17%

I compare this to my savings rate of 1.05% at an online bank, and am not very impressed, so I'm will keep reading for suggestions.

 

[audreyh1]

I had to go and grab my numbers, so maybe things are not quite as bad as I thought.

I hold VCSH : Vanguard Short-Term Corporate Bond Index Fund ETF

Bought it at $80.27 right now its $79.91 per share
But it has paid out over an 11 month period the annual rate of 1.8% dividends
I have this in an IRA so can ignore the "fake" capital gain statements. (in a taxable account I would add this to the basis and the loss would be larger).

Subtracting the real decrease in value from the dividends give me a annual rate of 1.36%
Had this been in a taxable account, my rate would be 1.17%

I compare this to my savings rate of 1.05% at an online bank, and am not very impressed, so I'm will keep reading for suggestions.

The online bank rate will be taxed too - so don't assume you get the full 1.05% after tax. You can compare pre-tax or after tax in both cases.

Look at total return when comparing. Not at NAVs. Morningstar will give you that information. The total return over the past year (ended 2/11/15) for the VCSH ETF was 1.7%, VBISX mutual fund was 1.1%. This is what you would compare to cash. So I think your fund did better than you think - 11 months isn't enough to compare to the current available 1.05% rate, you have to look at a whole year.

Vanguard Funds VBISX and VCSH 1 year chart

Yes - a corporate bond fund has a much higher credit risk than cash in addition to the interest rate risk. But you were compensated around 0.65% extra return for that additional risk last year. No guarantees going forward, of course.

 

[steelyman]

EDIT: I welcome any comments (as long as I'm not hijacking the thread too much).

That didn't seem like a hijack at all. We learn things around here, for example I had no idea what an I Bond was till reading posts here. Now I am a proud registrant at TreasuryDirect (with a currently-empty account ).

 

[pb4uski]

.....Look at total return when comparing. Not at NAVs. Morningstar will give you that information. The total return over the past year (ended 2/11/15) for the VCSH ETF was 1.7%, VBISX mutual fund was 1.1%. This is what you would compare to cash. ....Yes - a corporate bond fund has a much higher credit risk than cash in addition to the interest rate risk. But you were compensated around 0.65% extra return for that additional risk last year. No guarantees going forward, of course.

I could not disagree more. A good portion of the 1.7% total return compared to ~.9% for online savings accounts is due to short corporate bond interest rates declining slightly during the past year... in other words, interest rate gains.

But nonetheless, historical returns are not necessarily indicative of future returns. What is most important is what will happen in the upcoming year. The short term bond fund has an SEC yield of .92%. If interest rates don't change in the next year then the total return will be ~.9% the same as an online savings account but with some credit risk and significant interest rate risk. If interest rates increase then the online savings account will outperform the short term bond fund.... if interest rates decline then the short term bond fund will outperform online savings. Pick your poison.

 

[Sunset]

The online bank rate will be taxed too - so don't assume you get the full 1.05% after tax. You can compare pre-tax or after tax in both cases.

Look at total return when comparing. Not at NAVs. Morningstar will give you that information. The total return over the past year (ended 2/11/15) for the VCSH ETF was 1.7%, VBISX mutual fund was 1.1%. This is what you would compare to cash. So I think your fund did better than you think - 11 months isn't enough to compare to the current available 1.05% rate, you have to look at a whole year.

Vanguard Funds VBISX and VCSH 1 year chart

Yes - a corporate bond fund has a much higher credit risk than cash in addition to the interest rate risk. But you were compensated around 0.65% extra return for that additional risk last year. No guarantees going forward, of course.

I agree I would have to compare apples to apples, (taxable to taxable).
That's why I said:
Had this been in a taxable account, my rate would be 1.17% , as I was including the capital gain reported (but "fake" as fund went down) and the real loss in value of the fund if I sold it today.
It is better than the bank 1.05% but not by much considering the bank has zero risk of loss.

The problem I have with "total return" is that it is not real, my total return is including the real decrease in share value from the dividends give me a annual rate of 1.36%

So while I'm not pleased with it, the return is still better than I had imagined it was.

 

[audreyh1]

I could not disagree more. A good portion of the 1.7% total return compared to ~.9% for online savings accounts is due to short corporate bond interest rates declining slightly during the past year... in other words, interest rate gains.

But nonetheless, historical returns are not necessarily indicative of future returns. What is most important is what will happen in the upcoming year. The short term bond fund has an SEC yield of .92%. If interest rates don't change in the next year then the total return will be ~.9% the same as an online savings account but with some credit risk and significant interest rate risk. If interest rates increase then the online savings account will outperform the short term bond fund.... if interest rates decline then the short term bond fund will outperform online savings. Pick your poison.

I was not saying anything about whether the bond fund was better than cash going forward. I was explaining what the past return actually was.

 

[daylatedollarshort]

I should add to my previous post that we are also using stable funds and for the ladders they include mainly CDs and TIPS. I agree that CDs are often probably a better bet than at least some of our short term bond funds at current rates, but because of 401K investment restrictions on some of our retirement accounts we're using the short term funds as needed. I'd buy more credit union type CDs if I could.

 

[gcgang]

I personally am flaunting the core tenet of indexing by staying in VFSUX on the expectation that rates have just gotta go up soon--but people have been thinking that for quite a while now.... Then again, the VFSUX money is not merely ballast for me, since it also is my emergency fund, so my answer is likely different than yours.

Really? The symbol is VFSUX? Too funny.


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[mathjak107]

the last few weeks have seen rates rising on bonds. while there are no danger lights flashing yet i did move 10% more out of my bond funds and into my gowth and income mix.

it was only just a few years ago my income model was 90% bonds and bond type funds. today i am about 40% equities as bonds have been not appreciatiing at the rates they were although last year was pretty good but overall performance has been weak the last few years..