Maybe time to buy bonds back?

[Lsbcal]

I sold my investment grade short term bond fund (VFSUX) in early January. I knew it would be a good idea to buy it back at some time. Maybe this is about a decent time to wade back in? VFSUX now yields about 3.9% for a duration of 2.7 years.

I'm thinking maybe to do this buy back after the Fed FOMC meeting starts on July 26. Last FOMC meeting VFSUX went down that first day July 26 and then went up after the Powell announcement on July 27. The announcement is before the market closes on the 27th. And yes, such fine tuning may be unnecessary.

Here is a decent article from a Schwab person titled "Fed Rate Hikes: why are bond yields falling?" https://www.schwab.com/learn/story/fed-rate-hikes-why-are-bond-yields-falling?cmp=em-XCU

Some excerpts:

Economic growth is slowing

Gross domestic product (GDP) growth contracted in the first quarter, driven primarily by a drop in consumption. Since consumer spending comprises about 70% of GDP growth, a slowdown in spending is concerning. Early indications point to a risk that Q2 GDP growth was also likely weak. Two negative quarters of GDP growth isn't the official definition of recession, but it signals that the indicators are pointing in that direction.
...

Inflation expectations discounted in TIPS market have fallen
...

Falling commodity prices
...

How low can they go?

With headline inflation still high, it may be hard for bond yields to fall much below 2.75% in the near term. However, it also appears that the 3.5% level reached in June could mark the high for the year. If recent economic trends continue, it would not be surprising to see 10-year Treasury yields fall further in the second half of the year, perhaps as low as 2.5%. That may prompt the Fed to slow its pace of rate hikes and/or alter its tightening plan later in the year. However, it may seem counterintuitive, but the more the Fed "front loads" its rate hikes and runs the risk of triggering a recession, the lower bond yields can fall.

We suggest investors looking to add more yield to their portfolios consider adding more duration—exposure to interest rate risk—to their portfolios with bonds that have low credit risk, such as Treasuries and investment-grade corporate and municipal bonds. A bond ladder strategy can be an effective way to average into the market.

 

[aja8888]

There will be more FED meetings and rate increases this year (after July). If you notice, Canada and other nations are going "full on Volcker" with rate increases already this year to try to knock down inflation.

My feeling is that there will be more blood letting gong forward as this insidious inflation needs to be stopped and that will take some time. Plus, about $6? Trillion of liquidity needs to be pulled from the economy and that will be done over a multi year QT draw-down. That, along with higher interest rates, will kill the over-inflated housing market.

I feel it is too risky to go back into any kind of bond fund in the face of all this.

 

[Freedom56]

You should research more carefully. The distribution yield is only 2%. The average coupon it holds is only 2.7% so distributions are not about to soar. The SEC yield or Yield to Maturity that bond funds use (in this case 4%) is yet another scam to lure unsuspecting investors. That yield assumes that the fund hold every issue to maturity which just won't happen. Make no mistake, this fund and others like it are in a buy high sell low mode with fun holders suffering losses.

https://investor.vanguard.com/investment-products/mutual-funds/profile/vfsux

 

[foxfirev5]

Yeah, the discrepancy between SEC yield and distribution yield after the NAV has already fallen is a concern to me. Being retired and a simpleton to boot I simply use two ladders for my CD's/Bonds. One 5 year CD ladder and one long term LMP Treasury STRIP ladder for the next 17 years and growing. Oh yeah, and don't forget a bunch of Series I bonds for the really ugly stuff.

Bond Funds are a minority stake and used for asset rebalancing (market timing) and riskier HY/EM/Preferred bond income.

 

[Lsbcal]

You should research more carefully. The distribution yield is only 2%. The average coupon it holds is only 2.7% so distributions are not about soar. The SEC yield or Yield to Maturity that bond funds use (in this case 4%) is yet another scam to lure unsuspecting investors. That yield assumes that the fund hold every issue to maturity which just won't happen. Make no mistake, this fund and others like it are in a buy high sell low mode with fun holders suffering losses.

https://investor.vanguard.com/investment-products/mutual-funds/profile/vfsux

Good point about the distribution yield versus SEC yield.

 

[Freedom56]

Good point about the distribution yield versus SEC yield.

SEC yields are yet another scam perpetrated by the mutual fund/ETF industry to give the illusion that their rates are competitive. But those that read the fine print (i.e. what an SEC yield really is) can see it for what it is, a clever distraction from their distribution yield which is hidden in the details. As the Fed raises rates, short term yields will continue to rise and the yield curve will continue to invert. Short term bonds funds with low distribution yields compared to risk free treasuries and CDs will get scorched.

 

[pb4uski]

Good point about the distribution yield versus SEC yield.

The other yield that I look at is the portfolio yield less the expense ratio.

So for VSFUX right now:

SEC Yield: 3.91%
Distribution Yield: 2:04%
YTM: 4.2% less ER: 0.1%: 4.1%

 

[jazz4cash]

The SEC yield or Yield to Maturity that bond funds use (in this case 4%) is yet another scam to lure unsuspecting investors.

You should stop holding back and tell us what you really think. Seriously I decided awhile back that distribution yield is most important to me. Also I decided to avoid bond funds.

 

[Freedom56]

If people don't want to manage their own fixed income ladder, why not invest in an actively managed CEF that pays over 8%+ and monthly in distributions especially when they trade well below their asset values like PDT, FFC, FPF, or HPS? At least you are compensated for the risk. But something like VFSUX (VF sucks) makes absolutely no sense given what risk free CDs and treasuries offer.

 

[Graybeard]

I am surprised at the comments on SEC vs distribution yield. I was under the impression that the accurate yield was the SEC yield.

https://obliviousinvestor.com/distribution-yield-vs-sec-yield-which-is-more-useful/

 

[JBTX]

I have been doing the opposite steering into TIPS. I just can’t get my arms around the math in conventional bonds with such a low future expected inflation rate given where we are now vs TIPS.

There is a possibility that higher rates could cause onerous debt service obligations for some some companies, consumers and emerging markets, causing a widespread “hiccup” with people flocking to US treasuries.

 

[Lsbcal]

I have been doing the opposite steering into TIPS. I just can’t get my arms around the math in conventional bonds with such a low future expected inflation rate given where we are now vs TIPS.

There is a possibility that higher rates could cause onerous debt service obligations for some some companies, consumers and emerging markets, causing a widespread “hiccup” with people flocking to US treasuries.

I too am interested in TIPS. Half of our FI is in these and older iBonds. The current 5yr TIPS are almost at 0.5%.

 

[Lsbcal]

I am surprised at the comments on SEC vs distribution yield. I was under the impression that the accurate yield was the SEC yield.

https://obliviousinvestor.com/distribution-yield-vs-sec-yield-which-is-more-useful/

I compare the distribution yields of VFSUX and VMFXX money market fund for June. Seems like a good way to get a short term handle on the situation.

 

[Freedom56]

I am surprised at the comments on SEC vs distribution yield. I was under the impression that the accurate yield was the SEC yield.

https://obliviousinvestor.com/distribution-yield-vs-sec-yield-which-is-more-useful/

Don't believe everything you read on the internet. Simple math explains the situation more accurately. SEC yield is misleading when funds are holding so much low coupon debt. The value of those low coupon debt have fallen to compensate for the rise in yields but funds earn income from coupon payments that won't increase. Look at the change in distributions from January ($0.01485) through June ($0.01691) VFSUX versus the rise in short term rates. SEC yields were established at a time when funds were selling bonds at a premium and booking capital gains and boosting distributions to make the fun performance look better. SEC yield is a hypothetical estimate but does not reflect reality since funds don't hold all securities to maturity.

 

[DrRoy]

I recently got an 8 year BBB+ bond for 5%. Best rate I've seen in years.

 

[target2019]

SEC yields are yet another scam perpetrated by the mutual fund/ETF industry to give the illusion that their rates are competitive. But those that read the fine print (i.e. what an SEC yield really is) can see it for what it is, a clever distraction from their distribution yield which is hidden in the details. As the Fed raises rates, short term yields will continue to rise and the yield curve will continue to invert. Short term bonds funds with low distribution yields compared to risk free treasuries and CDs will get scorched.

I think I understand your point (which I've bolded).

30 day SEC yield (3.39%)
Yield to maturiy (3.7%)
Distribution yield (null)
https://investor.vanguard.com/investment-products/etfs/profile/bnd

Interesting! This is how we need to calculate the missing value, contained in a note. Sounds like real work.

"Distribution yield
The fund's current monthly income dividend per share, annualized by dividing by the number of days in the month and multiplying by 365, and shown as a percentage of the fund's average net asset value (NAV) during the month."

Now that we can calculate the distribution yield month-to-month, how is that actionable? I admit to being clueless about bond funds.

 

[Freedom56]

I recently got an 8 year BBB+ bond for 5%. Best rate I've seen in years.

I recently bought a A1/A rated 5 year note from TD bank at a coupon of 5% and also an A3/BBB+ 5 year note from CitiGroup with a coupon of 5%. You would have to go back to 2009 to see yields like that on high grade bonds.

 

[Freedom56]

I think I understand your point (which I've bolded).

30 day SEC yield (3.39%)
Yield to maturiy (3.7%)
Distribution yield (null)
https://investor.vanguard.com/investment-products/etfs/profile/bnd

Interesting! This is how we need to calculate the missing value, contained in a note. Sounds like real work.

"Distribution yield
The fund's current monthly income dividend per share, annualized by dividing by the number of days in the month and multiplying by 365, and shown as a percentage of the fund's average net asset value (NAV) during the month."

Now that we can calculate the distribution yield month-to-month, how is that actionable? I admit to being clueless about bond funds.

Isn't it convenient how Vanguard leaves the distribution yield calculation blank. This is 100% intentional given that it's a very simple moving average calculation. The company is a complete scam. Note that the average coupon is at 2.7% while the SEC yield is computed as 3.37%. Coupons are what the fund earns.

 

[Lsbcal]

I think I understand your point (which I've bolded).

30 day SEC yield (3.39%)
Yield to maturiy (3.7%)
Distribution yield (null)
https://investor.vanguard.com/investment-products/etfs/profile/bnd

Interesting! This is how we need to calculate the missing value, contained in a note. Sounds like real work.

"Distribution yield
The fund's current monthly income dividend per share, annualized by dividing by the number of days in the month and multiplying by 365, and shown as a percentage of the fund's average net asset value (NAV) during the month."

Now that we can calculate the distribution yield month-to-month, how is that actionable? I admit to being clueless about bond funds.

I am not sure what is going on with that BND etf distribution yield data as it shows "-" in the distribution yield field. But if you click on the Admiral Shares (mutual fund not etf) and then click on distributions you will clearly see the distribution data for all months. For June the distribution yield was 2.4%.

Normally I look at the fund data and not the etf data.

 

[target2019]

I am not sure what is going on with that BND etf distribution yield data as it shows "-" in the distribution yield field. But if you click on the Admiral Shares (mutual fund not etf) and then click on distributions you will clearly see the distribution data for all months. For June the distribution yield was 2.4%.

Normally I look at the fund data and not the etf data.

Thank you for pointing that out.

So your VFSUX Short Term Bond is NAV $10.08 and Yield 2.04%

I am going to wonder about this for awhile.

 

[obsessed]

I recently bought a A1/A rated 5 year note from TD bank at a coupon of 5% and also an A3/BBB+ 5 year note from CitiGroup with a coupon of 5%. You would have to go back to 2009 to see yields like that on high grade bonds.

Nice. Did you have to pay a premium on those?

 

[Freedom56]

Nice. Did you have to pay a premium on those?

No these were new issues sold at par. The TD Bank issue had a minimum $100K restriction at Fidelity. The others from Citigroup had the normal $1K minimum. New notes are being issued every week at much higher coupons than the past.

 

[Lsbcal]

Thank you for pointing that out.

So your VFSUX Short Term Bond is NAV $10.08 and Yield 2.04%

I am going to wonder about this for awhile.

As you can see VFSUX's distribution yield is rising fairly rapidly. It was 1.48% for January. I think for comparing what I will get for the next few months using distribution yield to compare VFSUX to VMFXX (Federal MM fund) is reasonable. So for June we have 2.04% vs 1.06%. VMFXX will rise more rapidly to meet the current yields as it has a duration of less then 1 month. Of course, these funds are very different in duration and thus purpose.

Over at Bogleheads the bond guys seem to favor SEC yield to compare funds. For example see the responses from Keven M. (scroll down a bit) https://www.bogleheads.org/forum/viewtopic.php?t=324242 .

There is a chart there showing SEC yield versus distribution yield for 23 years of Total Bond Market fund. Here is a copy of it:

The current wide variation in SEC yield versus distribution yields might be because of the huge recent rate changes. Currently for VBTLX (Total Bond Market) we have SEC yield = 3.37% and distribution yield = 2.40%. That is almost 1%. Looking at that 23 year chart it shows such a discrepancy for 1994, the year of one of the worst bond market routes.

Frankly, all this bond stuff has my head spinning.

 

[Freedom56]

The Bozohead is wrong and clearly don't understand what an SEC yield is. It's simple math. The distributions are based on coupon payments and capital gains. Let's scratch capital gains for now as the funds are holding billions in unrealized losses. With time the distribution yields will converge on the average coupon held in the fund. Their calculation of distribution yield is also misleading. Bonds pay semi-annually in most cases so total coupon payments vary from month to month. It should be a moving average of the last three to six months annualized not one month annualized. You can't put lipstick on a pig but these funds are sure trying.

 

[target2019]

As you can see VFSUX's distribution yield is rising fairly rapidly. It was 1.48% for January. I think for comparing what I will get for the next few months using distribution yield to compare VFSUX to VMFXX (Federal MM fund) is reasonable. So for June we have 2.04% vs 1.06%. VMFXX will rise more rapidly to meet the current yields as it has a duration of less then 1 month. Of course, these funds are very different in duration and thus purpose.

Over at Bogleheads the bond guys seem to favor SEC yield to compare funds. For example see the responses from Keven M. (scroll down a bit) https://www.bogleheads.org/forum/viewtopic.php?t=324242 .

There is a chart there showing SEC yield versus distribution yield for 23 years of Total Bond Market fund. Here is a copy of it:

The current wide variation in SEC yield versus distribution yields might be because of the huge recent rate changes. Currently for VBTLX (Total Bond Market) we have SEC yield = 3.37% and distribution yield = 2.40%. That is almost 1%. Looking at that 23 year chart it shows such a discrepancy for 1994, the year of one of the worst bond market routes.

Frankly, all this bond stuff has my head spinning.

Sure, it's spinning here too. But I think a decent anlaysis should fit on an index card! That thread ends in Sep 2020, so I wonder...