Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Historical view of cash versus ST bonds
Old 04-03-2012, 01:09 PM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,672
Historical view of cash versus ST bonds

Recently we had some discussions of putting short term money in cash or short term bonds. Here is a 20 year chart for cash (red), ST investment grade (blue), and ST index (green). The corresponding Vanguard symbols are: VMMXX (Prime Money Market), VFSUX, VBIRX.

Hopefully this chart will help with the decision of which to choose and when.




The data for VBIRX starts in 1997, hence the (false) negative glitch.
__________________

__________________
Lsbcal is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-03-2012, 01:30 PM   #2
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,074
Great chart, very informative, thanks for posting it.
__________________

__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 04-03-2012, 06:37 PM   #3
Thinks s/he gets paid by the post
 
Join Date: Feb 2007
Posts: 1,903
Thank you - very interesting. Surprising to see how closely vfsux tracks the index until the mayhem of 08-09.
__________________
ejman is online now   Reply With Quote
Old 04-03-2012, 07:42 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
But a big piece of the cushion is not present today. In years past, it was hard to lose money on 3 year paper because just about any conceivable interest rate change would be offset by the coupons on the bonds. With bond rates where they are today, I don't think we can say that today.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 04-03-2012, 08:02 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Feb 2007
Posts: 1,903
Quote:
Originally Posted by brewer12345 View Post
But a big piece of the cushion is not present today. In years past, it was hard to lose money on 3 year paper because just about any conceivable interest rate change would be offset by the coupons on the bonds. With bond rates where they are today, I don't think we can say that today.
So what could we say today? Obviously rates can't go negative so, if short term rates go from say ~1-2% today to a more "normal" 4-5% what impact would that have on the NAV of these short term funds? And how long would it take for the higher return to overpower the drop in NAV? (I know I'm asking for too much but as long as I'm asking...)
__________________
ejman is online now   Reply With Quote
Old 04-03-2012, 08:04 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by brewer12345 View Post
But a big piece of the cushion is not present today. In years past, it was hard to lose money on 3 year paper because just about any conceivable interest rate change would be offset by the coupons on the bonds. With bond rates where they are today, I don't think we can say that today.
In fact, with coupons of just 50bp, 3 year bonds are pretty close to zeros and have durations to match . . . about 3 years. It's hard to see a scenario where the U.S. reclaims a normal economic environment without 3-year bonds suffering multiple years of negative returns.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 04-03-2012, 09:18 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by ejman View Post
So what could we say today? Obviously rates can't go negative so, if short term rates go from say ~1-2% today to a more "normal" 4-5% what impact would that have on the NAV of these short term funds? And how long would it take for the higher return to overpower the drop in NAV? (I know I'm asking for too much but as long as I'm asking...)
Multiply the change in rates by the maturity of the bonds and that will give you a rough approximation of the loss. So if the bonds have an average maturity of 3 years and rates spike 4%, you have a 12% loss. This would be offset by the roughly 1% yield.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 04-03-2012, 09:34 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Feb 2007
Posts: 1,903
Quote:
Originally Posted by brewer12345 View Post
Multiply the change in rates by the maturity of the bonds and that will give you a rough approximation of the loss. So if the bonds have an average maturity of 3 years and rates spike 4%, you have a 12% loss. This would be offset by the roughly 1% yield.
Thank you brewer12345 . So, if ST rates go from 1% to 5% for a delta of 4% and the maturity is 3 years then NAV would go down by 12%. Then it would take 2.4 years at the new 5% rate to make up for the NAV loss. Is this correct?
__________________
ejman is online now   Reply With Quote
Old 04-03-2012, 10:52 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by ejman View Post
Thank you brewer12345 . So, if ST rates go from 1% to 5% for a delta of 4% and the maturity is 3 years then NAV would go down by 12%. Then it would take 2.4 years at the new 5% rate to make up for the NAV loss. Is this correct?
Very roughly, yes. Things get a lot more complicated depending on the exact nature of the fixed income securities in the fund and how the fund is managed.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 04-04-2012, 05:34 AM   #10
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,406
Quote:
Originally Posted by ejman View Post
Thank you brewer12345 . So, if ST rates go from 1% to 5% for a delta of 4% and the maturity is 3 years then NAV would go down by 12%. Then it would take 2.4 years at the new 5% rate to make up for the NAV loss. Is this correct?
Roughly 2.4 years plus inflation and taxes.
__________________

__________________
MichaelB is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
The Danger of Low Carb Diets.. REattempt Health and Early Retirement 121 05-07-2012 08:28 PM
How am I using 21,000 gallons of water a month? soupcxan FIRE and Money 118 05-05-2012 02:00 PM
Speaking of calling.... omni550 Other topics 61 04-04-2012 10:50 PM
A couple of simple and random questions seraphim FIRE and Money 35 04-04-2012 08:11 PM
Is it OK to have cash/near cash in a ST Bond Fund? ejman FIRE and Money 41 04-03-2012 12:34 PM

 

 
All times are GMT -6. The time now is 06:29 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.