Bonds Pay Nothing?

[slowsaver]

I keep reading in the news that US Treasuries are paying "nothing" or are actually negative. (This has been mentioned as a reason for why people are taking risks with stocks right now.)

Yet, I keep checking my $300k of VWIUX and it continues to pay around $650 every month, with very little variation.

This continues to be true, even 5 months after news that 3 month US Treasuries have turned negative:

https://www.cnbc.com/2020/03/25/neg...th-treasury-bill-yields-are-now-negative.html

I would expect my VWIUX to be paying less by now.

Can anyone explain to me what is going on here? Thanks.

 

[Retiired]

The “paying nothing or are actually negative” typically is referring to the actual yield vs inflation and not what they are paying out in annual percentage rate directly. If inflation rate is 2% and a 10 year bond is yielding .6% then your REAL return is negative to inflation.

Although some of the very short term treasury bills have gone actually negative periodically as referenced in your link.

 

[LivetheDream]

RE: Vanguard Intermediate Bond Fund

I keep reading in the news that US Treasuries are paying "nothing" or are actually negative. (This has been mentioned as a reason for why people are taking risks with stocks right now.)

Yet, I keep checking my $300k of VWIUX and it continues to pay around $650 every month, with very little variation.

This continues to be true, even 5 months after news that 3 month US Treasuries have turned negative:

https://www.cnbc.com/2020/03/25/neg...th-treasury-bill-yields-are-now-negative.html

I would expect my VWIUX to be paying less by now.

Can anyone explain to me what is going on here? Thanks.

____________________________

VWIUX is Vanguard Intermediate Term Bond Fund. Looking at the description at least 75% of the bonds are in Municipal Top rated bonds ( less risk) up to 20 % in medium grade ( a little more risk) and 5% in low grade ( more risk) ... Federally tax exempt.

So - they are not short term treasuries - considered the lowest risk of default, i.e. backed by the full faith of the US government ...but pay next to nothing. ...Muni's are bonds for specific projects, like water reclamation, airport construction, etc...the annual report on Vanguard site will show the projects/bonds they have invested in and the rates. looks like the current yield paid on 8/3 was 2.39% the Yield on 12/31/19 was 2.56% ...so came down a bit ( some bonds in the portfolio from say 5 or 6 years ago might have expired, and new ones purchased with less current yield were added bringing down the portfolio's overall yield. Hope that helped a bit at least. New to the forum as of today.

 

[npage]

Long as you do not mind the value moving around a bit (muni bond funds will and do, recent history really illustrates this) and just want the monthly income that seems like a decent fund. While risk is not guaranteed like a CD, seems reasonable risk for 2.5% income. Depending on our tax situation that is a 3-3.5% or so taxable equivalent.

 

[BeachOrCity]

i always look at yield and term premium of cash / cd's / bonds. You should be compensated for both term / duration and risk of each appropriately.

Right now (as in post 3/2020) the term and risk premiums are greatly reduced. I don't personally feel that for either I am appropriately compensated in terms of interest rate.

But I also see a risk that my "cash" will become less valuable with a declining dollar or inflation in future years.

One thing about bonds, that I think people should NOT focus on is the change in value due to the overall market rise / decline in bond yields. You don't control that, and it should be thought of as random. MUCH of what bonds have returned since the 1980's is due to the reduction of interest rates. This is somewhat analogous to the market being 10X earnings (or whatever) in the 1980's, but being 24X earnings today. Some of that is due to lower rates, but alot of it is just due to people paying more for each dollar of earnings.

 

[jazz4cash]

The bonds you hold individually or in a bond fund will continue to pay their stated coupon. That is a feature of a bond. Unless it defaults it will pay the coupon until maturity and the principal is returned. The “pays nothing or zero” refers to new bonds that are being issued at these ultra low rates. It’ll take quite awhile before a bond fund will gradually reflect lower returns as newer low coupon bonds replace older ones.

 

[slowsaver]

Thanks for the helpful info. Reading more about VWIUX, I now see that the average duration of their bonds is 4.6 years, with 42% of the bond duration at 10 - 20 Years. Only 7.1% of the bonds are less than 1 year. Makes sense why my payments haven't dropped (yet).

Hypothetically, if a LOT of people suddenly decided to buy VWIUX today (due to market fears, for example), wouldn't the fund be forced to buy a lot more bonds today? Those new bonds would be at a lesser rate, and pull-down the yield of the fund?

 

[npage]

Since you don't own the actual bond in a fund till maturity they are managing their portfolio with constant buying and selling to obtain their objectives based on the market of the moment. As such bond fund themselves have a value component driven purely by market perception of their value and move up and down regardless of the underlying bonds themselves. Though if you look at one over a long enough timeline I find they have a certain relative value they tend to stick around.

So it is not exactly like simply holding the bond itself to maturity in which you assuming no default you collect the full amount back at maturity.That said, I will pay the people at Vanguard to worry about that for me as I don't have the interest, access or skill to pick the right individual bonds. I know there are some here that are big proponents of buying the bonds directly.

To me I look at the stability of a bond funds payments relative to the price I paid to obtain my own personal yield assuming I never sold it. So if at X price today it is a 3% yield and I like that and do not have an immediate need for the money I make my call.
YMMV.

 

[jazz4cash]

.

Hypothetically, if a LOT of people suddenly decided to buy VWIUX today (due to market fears, for example), wouldn't the fund be forced to buy a lot more bonds today? Those new bonds would be at a lesser rate, and pull-down the yield of the fund?

I don’t think they would be forced to buy immediately. I think they would invest in some safe short term securities and gradually buy bonds that meet their overall objective.