ST Bond fund questions...

[COcheesehead]

i guess my hourly FA who suggested about 200k of inherited $$ into SHY about a month ago is entirely wrong by your forecast.

Here is the one month return on SHY

 

[Lsbcal]

Here is a chart I made for my purposes. The 3 month Treasury is a proxy for the Fed Funds rate which move together. It shows that bond funds can really take off as soon as the 3 month Treasuries start to flatten or such a situation is recognized as a pause by the markets. Not easy to catch the initial upward thrust.

VFSUX = ST investment grade
VFIUX = intermediate Treasuries
VFIDX = intermediate investment grade

 

[mikes425]

Here is the one month return on SHY

So...if you are in the market for longer than a one month period...and looking 1, 3 or 5 years out...still a bad choice?

 

[mikes425]

Here is a chart I made for my purposes. The 3 month Treasury is a proxy for the Fed Funds rate which move together. It shows that bond funds can really take off as soon as the 3 month Treasuries start to flatten or such a situation is recognized as a pause by the markets. Not easy to catch the initial upward thrust.

VFSUX = ST investment grade
VFIUX = intermediate Treasuries
VFIDX = intermediate investment grade

I prefer your take on this

 

[mikes425]

I can't be the only one here who is holding ST bond funds. If one has experienced the NAV losses of 2022 and has continued to hold, isn't one foolish to exit such positions when in fact, one hasn't technically "lost" until one 'sells' - and, ones returns - in the form of the dividends that are improving in tandem with rising interest rates - are improving. Am I extraordinarily missing something ?

 

[COcheesehead]

So...if you are in the market for longer than a one month period...and looking 1, 3 or 5 years out...still a bad choice?

You asked if your financial person’s recommendation regarding SHY 30 days ago was wrong. It lost you money in that time frame. If rates continue upward as we are told they likely will, you will continue to lose money.

 

[audreyh1]

I can't be the only one here who is holding ST bond funds. If one has experienced the NAV losses of 2022 and has continued to hold, isn't one foolish to exit such positions when in fact, one hasn't technically "lost" until one 'sells' - and, ones returns - in the form of the dividends that are improving in tandem with rising interest rates - are improving. Am I extraordinarily missing something?

I prefer holding bond funds and have owned them since late 90s. I don’t move in and out of asset classes in anticipation of markets trends - that’s just not my investing style.

I do rebalance occasionally to maintain my target asset allocation. So when a given asset class gets hit harder than others I’m buying more. It just doesn’t bother me.

 

[COcheesehead]

I can't be the only one here who is holding ST bond funds. If one has experienced the NAV losses of 2022 and has continued to hold, isn't one foolish to exit such positions when in fact, one hasn't technically "lost" until one 'sells' - and, ones returns - in the form of the dividends that are improving in tandem with rising interest rates - are improving. Am I extraordinarily missing something ?

You can roll 3-9 month treasuries right now, make 5%+ and not lose a dime in principle.

 

[mikes425]

You can roll 3-9 month treasuries right now, make 5%+ and not lose a dime in principle.

Ok BUT... when you cite performance, are you also factoring in the fund's dividend and return, i.e., income, not just NAV?

 

[COcheesehead]

Ok BUT... when you cite performance, are you also factoring in the fund's dividend and return, i.e., income, not just NAV?

Does SHY’s coupon make up for what you lost in the last 30 days? You can answer that. Will that same coupon continue to make up for the NAV erosion if/when rates continue upward? This concept has been discussed at length on here. Some realize that bond funds are not bonds, they have no preset value to return to and your capital can erode. They are two different animals. Some just want to hit the “easy” button and invest in funds. That’s fine too. There are better ways with just a bit more effort. Do whatever you want. I feel individual bonds provide income and capital preservation characteristics.

 

[all4j]

I don’t see a repeat in 2023 of the nav downturns to the same extent. That is not to suggest that bond funds (or individual bonds) are worthy investments at present. Certainly, largely depends upon the objectives of the investor. Part of the reason so many posts talk past each other is that they really have different objectives they are trying to meet.

A quarter or half point rise has different impact if the existing rate is a half point versus four and a half points.

I saw mention of bonds moving in the same direction as equities….that implies interest in correlation &/or impact of rebalancing. Equity indexes have become more concentrated in growth stocks than at times in the past. Growth stocks will be more interest rate sensitive & cause a more positive correlation to some parts of yield curve.

Really important to know the time horizon & investing objectives

 

[mikes425]

I don’t see a repeat in 2023 of the nav downturns to the same extent. That is not to suggest that bond funds (or individual bonds) are worthy investments at present. Certainly, largely depends upon the objectives of the investor.
\\

So my objective with a 50/50 AA would be to achieve consistent income dividend, and reasonable growth of say, minimum 5-7% a year with capital preservation spending of abt. 50k/yr, relatively low COLA, at 64 y/o and self employed semi-retirement and aforementioned 2.5mm asset base not inclusive of add'l 200k in property and with no debt...and estimated div income for this year of about 80k.
SS will be in the realm of 21k/yr whenever i choose to take it... Medicare kicks in this year. All that said, is having a portion of my 50% FI in ST Bond funds 'dangerous' at this stage, given the above circumstances and 'time horizon' ? (Loaded answer I guess LOL)

 

[FiveDriver]

I'm just watching these Bond Funds, Intermediate and otherwise, and I just don't see the upside in light of what the Fed has continued to tell us. They've painted a pretty clear picture here.

Last March, I moved a large chunk of money out of the QQQ and SPY positions and I've been sitting in Fido's MM. Between the downturn I avoided and the monthly Dividend I collected......I'll sit this dance out.

 

[COcheesehead]

Anyone about to enter retirement and is interested in income with capital preservation should research Kitces’ Bond Tent or Rising Equity Glide Path strategy. It saved my retirement.

 

[Lsbcal]

...
SS will be in the realm of 21k/yr whenever i choose to take it... Medicare kicks in this year. All that said, is having a portion of my 50% FI in ST Bond funds 'dangerous' at this stage, given the above circumstances and 'time horizon' ? (Loaded answer I guess LOL)

ST Bond funds are not all alike. A fund like VFSUX ST investment grade took a back in 2008 due to have some equity like exposure which investment grade funds have. So some volatility due to business conditions can be expected while getting some extra return. That is, they have credit risk which a ST Treasury fund does not.

 

[target2019]

We're about 50/50 balanced. I just measured last month's allocation.

At the beginning of last year we moved some ST Bond to money markets, I-bonds, hi-yield, etc. Some bloodshed was avoided.

Other moves have been made over past two years, from consolidation, etc.

 

[all4j]

All that said, is having a portion of my 50% FI in ST Bond funds 'dangerous' at this stage, given the above circumstances and 'time horizon' ? (Loaded answer I guess LOL)

One key difference can be whether you are reinvesting distributions. If you are, then you are essentially DCA’ing in & that offsets the nav drop if your holding period is as long or longer than fund duration. No one knows how the yield curve inversion will be resolved or when (imo, it will be though at some point). So, all of this has a margin for error. If this is in a taxable account, then occasional tlh can also be considered.

If you are spending the distributions, I would think of that as more of a savings situation than investing. Not wanting to start a argument over the difference, but I tend to think of investing as taking on risk. That is, particularly in real terms, your capital is at risk. So, if returns (in this case, distributions) are to be spent, then your time horizon for that is very short & you don’t want to be in a market. Perhaps spend some time thinking about what your alternate would be. That is, if I don't use this fund, will my next option be more or less risky?

There are no free lunches. Some prefer locking in nominal terms their coupon rate & maturity values. Others prefer liquidity, rising distributions, etc with attendant risk that varies based on duration & market action. Both have risks & possible “danger”. Markets somewhat rely on a difference of need & opinion.

 

[Chuckanut]

I can't be the only one here who is holding ST bond funds. If one has experienced the NAV losses of 2022 and has continued to hold, isn't one foolish to exit such positions when in fact, one hasn't technically "lost" until one 'sells' - and, ones returns - in the form of the dividends that are improving in tandem with rising interest rates - are improving. Am I extraordinarily missing something ?

Just because you have not realized the loss doesn’t mean the loss is not real. It is. The issue is simple. What’s the best thing to do now with the money? For many people doing nothing may be better. Others may decide to redeploy the funds. It’s a very individual decision.

For example I have a brokered Cd earning 3.1%. It is down in price today. I’m can hold it to maturity and the price will rise back to what I paid for it. Or I could sell it and redeploy the dollars at about 5%. Which will earn me more total dollars over the next six months? It’s a wash. No significant difference. So, I do nothing, and put my effort into more productive activities.

Last year I sold all of my ST bond fund. Within a week it went up 10 cents a share. But, I redeployed the money and am now earning over 4% on those funds. Was that a smart move? So far, no. Longer term? I think so. Time will tell.

Edit to add: just checked yesterday’s closing. The ST fund mentioned above is now only 1 cent higher than when I sold. Some of the money that was earning about 4% after the sale and redeployment will soon be earning 5% assuming today’s rates hold for another month.

 

[pb4uski]

I can't be the only one here who is holding ST bond funds. If one has experienced the NAV losses of 2022 and has continued to hold, isn't one foolish to exit such positions when in fact, one hasn't technically "lost" until one 'sells' - and, ones returns - in the form of the dividends that are improving in tandem with rising interest rates - are improving. Am I extraordinarily missing something ?

First, your losses to date are a sunk cost common to both the stay or change alternatives, so they are not really relevant to the decision. What is relevant is what can be reasonably expected to happen from here forward.

Here is what you are missing IMO. I'll use the Vanguard Short-Term Index Fund as an example. If you invest $100, then based on recent distributions you can expect to receive distributions of 2% based on this table:

Type	$/Share	Payable date	Record date	Reinvest date	Reinvest price	Distribution yield
Dividend	$0.015323	03/01/2023	02/28/2023	02/28/2023	$9.84	2.02%
Dividend	$0.016319	02/01/2023	01/31/2023	01/31/2023	$9.98	1.93%
Dividend	$0.015614	01/03/2023	12/30/2022	12/30/2022	$9.87	1.86%
Dividend	$0.014496	12/01/2022	11/30/2022	11/30/2022	$9.89	1.80%

The average coupon of the portfolio is 2.3% so the distribution yield may rise to 2.3% over time. The average maturity is 2.8 years, so let's call that 3 years.

If instead of putting $100 in VBIRX instead you bought a 5 year CD ladder with rungs of $20 each, that would yield 5.33% and have a weighted average maturity of 3 years.

10 - 12 months	2 years	3 years	4 years	5 years
5.35%	5.30%	5.40%	5.20%	5.40%

What would you rather have 2.02% rising to 2.3% or 5.33%? Plus with the ladder if rates rise further while the value of both VBIRX and the ladder will decline with the ladder you can chose to hold the CDs to maturity, not an option available to the bond fund holder.

 

[Lsbcal]

...

What would you rather have 2.02% rising to 2.3% or 5.33%? Plus with the ladder if rates rise further while the value of both VBIRX and the ladder will decline with the ladder you can chose to hold the CDs to maturity, not an option available to the bond fund holder.

Frankly I am not sure how to make this comparison. But the SEC yield for VBIRX is 4.75%. The distribution yield is, I believe, just due to the older bonds having a lower yield. Their price has adjusted to be competitive with current bonds. If distribution yield is your criteria then that is important. But I just look for total return which is a combination of price change + distribution yield.

 

[pb4uski]

If you look at the fund's financial statements, then you'll see that the distributions track very closely with interest income. Pick 5 different bond funds and compare the portfolio average coupon with the distribution yield over recent monthsand you will see the same pattern.

So to make the comparison easier, let's say that in 2023 there are no changes in interest rates... the fund will collect the coupons and then distribute it to the fundholders and there would be no change in unrealized gains or losses so the return would be solely the distributions.

 

[COcheesehead]

Frankly I am not sure how to make this comparison. But the SEC yield for VBIRX is 4.75%. The distribution yield is, I believe, just due to the older bonds having a lower yield. Their price has adjusted to be competitive with current bonds. If distribution yield is your criteria then that is important. But I just look for total return which is a combination of price change + distribution yield.

SEC yield … a joke

Distribution yield is real.

 

[Lsbcal]

If you look at the fund's financial statements, then you'll see that the distributions track very closely with interest income. Pick 5 different bond funds and compare the portfolio average coupon with the distribution yield over recent monthsand you will see the same pattern.

So to make the comparison easier, let's say that in 2023 there are no changes in interest rates... the fund will collect the coupons and then distribute it to the fundholders and there would be no change in unrealized gains or losses so the return would be solely the distributions.

First, I am no bond expert. Second, are you not account for the fact that when the low paying bonds in a fund have been repriced those bonds when they mature will pay out more?

From Investopedia https://www.investopedia.com/ask/answers/013015/how-does-face-value-differ-price-bond.asp

Prevailing market interest rates change after a bond is issued, and bond prices must adjust to compensate investors. If interest rates rise, then bond prices must fall. Suppose a three-year bond pays 3% when it is issued, and then market interest rates rise by half a percentage point a year later.

To sell the bond in the secondary market, the price of the bond will have to fall about 1% (extra 0.5% per year x 2 years), so it will be trading at a discount to face value. New bonds issued from firms with similar credit quality are now paying 3.5%. The old 3% bond still pays 3% in interest, but investors can now look forward to an extra 1% when the bond matures. Similarly, the price of the bond must rise if interest rates fall.

 

[COcheesehead]

The misunderstanding of bonds vs bond funds continues.

 

[pb4uski]

But to use your example, let's assume that the fund bought a 3% coupon bond at par some years ago and will hold to maturity so the fund will only get a 3% yield.

Interest rates increase and the value of the bond declines by 1%, so if someone bought the bond today at a 1% discount then the bond would end up yielding 3.5% over the remaining 2 year term (3% coupon plus 1% discount/2 years).

But.... the fund is NOT buying the bond today... it already holds it. The most that the fund will ever get out of that bond is 3% plus their par therefore the most it can ever distribute to the fundholder is 3%.

SEC yield
A non-money market fund's SEC yield is based on a formula developed by the SEC. The method calculates a fund's hypothetical annualized income as a percentage of its assets.

A security's income, for the purposes of this calculation, is based on the current market yield to maturity (for bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30-day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience. As a result, income distributions from the fund may be higher or lower than implied by the SEC yield.