VFMXX and VBTLX - please augment my understanding

[SecondCor521]

Hi all.

I don't know a whole lot about bond mutual funds.

Suppose there exists an investor who has some money lying around in a taxable account. Federal tax rate of 22%, state tax rate of 5.8% with the typical rule where USGO is state tax exempt. No real plans for the money; it's sort of a cash reserve in case there is a big spike or one-off expense. The investor is well capitalized (~1.8% WR) and moderately aggressive risk-wise (~70/30 overall).

Currently the money is split about 46/54 between VFMXX and VBTLX.

VFMXX seems to be mostly invested in short term treasuries and is paying about 4.5%. As such, it seems like it will track short term rates with little to no lag.

VBTLX has more mid-term government paper and some investment grade corporates. Duration of six-ish years. Currently paying 4.3% or so. It seems like if interest rates drop in the future, the return on this fund would go up in the short term (because it would then be holding intermediate bonds paying higher interest) and then drop after a while (because those bonds would mature and be replaced by lower interest rate bonds).

Most people I know seem to think that rates may go somewhat higher in the near term, then level off and then drop off if inflation is deemed tamed and a recession starts. That's sort of what I think, but I'm pretty low confidence on the timing, direction, and duration of any of that - pretty much nobody expected SVB to collapse two weeks ago, for example.

Setting aside other potential investments (precious metals, CDs, MYGAs, individual bonds, etc.) and only focusing on these two funds:

1. Is my understanding of these two funds approximately on point?

2. Any suggestions regarding considerations between how the money is allocated between those two funds that the investor should consider?

Thanks!

 

[mrfeh]

When will the money be needed? It sounds like it's kind of an emergency fund.

If true, it shouldn't be in VBTLX...match your investments with the time horizon.

 

[target2019]

Your understanding is correct.

Looking just at the yields, the one with less state tax is preferable.

VBTLX is simply wrong for a taxable account, and the duration is too long for your purpose. Your need might come next month, for example.

We use Discover Bank (3.6%) and SWVXX money market (4.49%) for the purposes you mention.

We used to use a short-term tax exempt fund, but Vanguard closed ours.

 

[VanWinkle]

When will the money be needed? It sounds like it's kind of an emergency fund.

If true, it shouldn't be in VBTLX...match your investments with the time horizon.

+1

I have both of these funds- one for house purchase in the VMFXX needed later this year, and
the longer duration VBTLX for RMDs in about 6 years. VBTLX is in my IRA and VMFXX is in
my taxable brokerage at Vanguard.

 

[SecondCor521]

When will the money be needed?

Good question.

The taxable account sits between the IRA and the checking. IRA RMDs go in to the taxable every month, an automatic transfer goes out to checking to cover bills.

The current status quo is that the RMD amount exceeds the bill pay transfer amount by about 33%. Said another way, each month the taxable account gets about 1.2% added to the corpus.

At this point, the most likely use for the money would be to cover increased medical out of pocket. The timing and size of this increase is hard to predict. If I had to guess, I'd say the bill pay / medical outflow wouldn't exceed the RMD inflow for another year or two. At that point, it might exceed it for six months to a year at the rate of maybe 1% a month.

So the current corpus will probably never drop below 88% of it's current amount. (The current amount represents about 2.5 years of expenses at the current run rate. Each year of excess accumulation adds about 4 months of expenses.)

 

[SecondCor521]

VBTLX is simply wrong for a taxable account, and the duration is too long for your purpose.

Why do you say that VBTLX is simply wrong for a taxable account? It appears to have a better after tax yield than VMFXX for the tax brackets mentioned in the OP. At least at current yields; who knows what yields will do in the next year or three.

I'll consider the notion of a shorter term bond fund, thank you.

 

[Golden Mean]

Hi all
VBTLX has more mid-term government paper and some investment grade corporates. Duration of six-ish years. Currently paying 4.3% or so.
Thanks!

Note that VBTLX is not paying 4.3%. The dividend is about 2.9%. As far as I can tell, the SEC yield on bond funds is nonsense.

 

[pb4uski]

Note that VBTLX is not paying 4.3%. The dividend is about 2.9%. As far as I can tell, the SEC yield on bond funds is nonsense.

+1. Woof-woof.

 

[SecondCor521]

Note that VBTLX is not paying 4.3%. The dividend is about 2.9%. As far as I can tell, the SEC yield on bond funds is nonsense.

Right, thank you (and @pb4uski).

The 4.3% number was (obviously) the SEC yield from the fund information page.

Looking at a February statement, it lists a yield of 2.49% and the actual math (dividend / 12 * February month end value) is about 2.67%

The VMFXX yield doing the same math on the February statement is about 4.2%.

Sigh. You can't trust anyone any more.

...

As a result of all this, plus some thinking, will probably result in a modest remodel of this portion of the portfolio. I've got to consider everything though: the various investment risks, AA, taxes, asset placement, interest rates, more thorough thoughts about when the money might be needed and how much, etc.

I have some preliminary thoughts but need to let things marinate more.

I meant to say this earlier, but thanks to all for the various responses. I really appreciate them.

 

[mrfeh]

Note that VBTLX is not paying 4.3%. The dividend is about 2.9%. As far as I can tell, the SEC yield on bond funds is nonsense.

+1. Woof-woof.

Right, thank you (and @pb4uski).

The 4.3% number was (obviously) the SEC yield from the fund information page.

Looking at a February statement, it lists a yield of 2.49% and the actual math (dividend / 12 * February month end value) is about 2.67%

The VMFXX yield doing the same math on the February statement is about 4.2%.

Sigh. You can't trust anyone any more.

...

As a result of all this, plus some thinking, will probably result in a modest remodel of this portion of the portfolio. I've got to consider everything though: the various investment risks, AA, taxes, asset placement, interest rates, more thorough thoughts about when the money might be needed and how much, etc.

I have some preliminary thoughts but need to let things marinate more.

I meant to say this earlier, but thanks to all for the various responses. I really appreciate them.

You guys really need to do some reading on bond fund yields. These comments indicate a complete lack of understanding that will probably lead to poor decisions.

 

[SecondCor521]

You guys really need to do some reading on bond fund yields. These comments indicate a complete lack of understanding that will probably lead to poor decisions.

I admitted at the top of the thread that I don't know much about this area. Original post, second paragraph.

If you would provide some pointers to educational resources that you think would be high quality providers of understanding rather than just stating the obvious and being critical without being constructive, I would appreciate it.

Alternatively, perhaps you could point out one or two points where you believe I lack understanding, I would appreciate being educated.

Thanks in advance.

 

[Freedom56]

You guys really need to do some reading on bond fund yields. These comments indicate a complete lack of understanding that will probably lead to poor decisions.

Poor decisions like investing in bond funds?

 

[SecondCor521]

Trying to learn about a buy-at-issue-hold-to-maturity brokered CD ladder. Questions:

1. Is there a way to filter out callable CDs, or do I just have to look at the terms for each one? (So far most that I have looked at are not callable. I'd imagine that callable CDs are more common on longer term issues, like 5 years and longer.)

2. For example, I see a 5.25% new issue 2 year brokered CD from Morgan Stanley Bank (CUSIP 61690U3J7). What, generally speaking, is Morgan Stanley doing with that capital they're raising from me? I'd guess they're using it to invest in mortgages or credit cards or personal loans at higher rates, but it seems like they could get cheaper capital somewhere else. Maybe not.

3. Since these are all FDIC insured (amounts would be under FDIC limits) and assuming in this case I trust FDIC insurance, there seems to be little reason to worry about who the CD seller is, and just pick on coupon rate and interest payment schedule. What, if anything, is wrong with this view?

 

[foxfirev5]

FWIW the distribution yield for VBLTX has risen from 1.9% to 2.9% over the last 12 months. This lags the SEC yield but is catching up. Years ago when rates were declining I remember the opposite. Distribution yields where higher than the SEC yield. This gave everyone a heads up where the yields were headed. (down)

By the way, I see virtually identical performance between my bond ladders and my small bond fund holdings. I'm not selling either so it doesn't matter, but the losses are still there.

 

[mrfeh]

Poor decisions like investing in bond funds?

I'm almost looking forward to all the "why did I sell by total bond fund?" messages that will appear on this board in a couple years.

 

[pb4uski]

I'm almost looking forward to all the "why did I sell by total bond fund?" messages that will appear on this board in a couple years.

Unlikely, so don't get your hopes up. I much prefer the additional control and transparency that I have with individual bonds over the black box of bond funds.

 

[pb4uski]

Trying to learn about a buy-at-issue-hold-to-maturity brokered CD ladder. Questions:

1. Is there a way to filter out callable CDs, or do I just have to look at the terms for each one? (So far most that I have looked at are not callable. I'd imagine that callable CDs are more common on longer term issues, like 5 years and longer.)

2. For example, I see a 5.25% new issue 2 year brokered CD from Morgan Stanley Bank (CUSIP 61690U3J7). What, generally speaking, is Morgan Stanley doing with that capital they're raising from me? I'd guess they're using it to invest in mortgages or credit cards or personal loans at higher rates, but it seems like they could get cheaper capital somewhere else. Maybe not.

3. Since these are all FDIC insured (amounts would be under FDIC limits) and assuming in this case I trust FDIC insurance, there seems to be little reason to worry about who the CD seller is, and just pick on coupon rate and interest payment schedule. What, if anything, is wrong with this view?

1. For Schwab as I recall it says callable in the description, I know for sure that it does for bonds and am pretty sure it does for CDs. Also, if you do an advanced search you can select just non-callable. I wouldn't shy away from callable if the yield were attractive enough, I have several callable GSE bonds.

2. What does it matter? That that are paying you 5.25% should be enough. Besides, you are not providing them capital since you are not buying MS common or preferred stock. They are likely using your CD money to make loans at more than 5.25% and it's as simple as that.

3. No, nothing wrong with that view. If it is FDIC insured I don't worry about the issuer. I avoid Bank of China and some other CDs for political reasons but not because of credit concerns.

Finally, I consider not only CDs, but also US Treasuries and GSE bonds as I view them all as having no or negligible credit risk. While currently brokered CDs are offering better yields, that isn't always the case and at times UST offer better yields and quite often GSE bonds offer even better yields but they are often callable. I don't mind some callable as long as I'm getting compensated for it.

 

[target2019]

Why do you say that VBTLX is simply wrong for a taxable account? It appears to have a better after tax yield than VMFXX for the tax brackets mentioned in the OP. At least at current yields; who knows what yields will do in the next year or three.

I'll consider the notion of a shorter term bond fund, thank you.

I don't know much about your situation with investments. We keep all taxable bond index funds in deferred tax accounts like IRA and SEP-IRA.

For VBTLX--I was thinking about this chart. It's two versions of the same concept. And tweaks apply depending on your tax bracket.

I suppose this chart is more about comparing two investments, and one choice is more or less tax-efficient in taxable account(s).

 

[Freedom56]

Unlikely, so don't get your hopes up. I much prefer the additional control and transparency that I have with individual bonds over the black box of bond funds.

and the capital preservation, higher yields...

 

[Golden Mean]

Note that VBTLX is not paying 4.3%. The dividend is about 2.9%. As far as I can tell, the SEC yield on bond funds is nonsense.

You guys really need to do some reading on bond fund yields. These comments indicate a complete lack of understanding that will probably lead to poor decisions.

Useful.

The dividend is what it is. Currently $0.021782 per share on $9.50 NAV. If you bought anytime between 2013 and 2021 your dividend yield is even worse and you've lost capital.

 

[Freedom56]

Useful.

The dividend is what it is. Currently $0.021782 per share on $9.50 NAV. If you bought anytime between 2013 and 2021 your dividend yield is even worse and you've lost capital.

This is where "cash stuffed in a mattress" becomes a benchmark asset class.

 

[SecondCor521]

1. For Schwab as I recall it says callable in the description, I know for sure that it does for bonds and am pretty sure it does for CDs. Also, if you do an advanced search you can select just non-callable. I wouldn't shy away from callable if the yield were attractive enough, I have several callable GSE bonds.

2. What does it matter? That that are paying you 5.25% should be enough. Besides, you are not providing them capital since you are not buying MS common or preferred stock. They are likely using your CD money to make loans at more than 5.25% and it's as simple as that.

3. No, nothing wrong with that view. If it is FDIC insured I don't worry about the issuer. I avoid Bank of China and some other CDs for political reasons but not because of credit concerns.

Finally, I consider not only CDs, but also US Treasuries and GSE bonds as I view them all as having no or negligible credit risk. While currently brokered CDs are offering better yields, that isn't always the case and at times UST offer better yields and quite often GSE bonds offer even better yields but they are often callable. I don't mind some callable as long as I'm getting compensated for it.

Thanks, @pb4uski.

1. I couldn't find it at first, but I'll play around with it a bit more. And I don't mind callable except it adds analysis complexity...as a fixed income newbie, I'll start out simple at first.

2. Despite how I appear in this thread so far, I do like to understand how things work. I feel it is a defense against scams and Ponzi schemes, and even if everyone else is doing something and says it's fine, I like to prove it to myself if I can. And yes, I understand the difference between a bank deposit and a share of common stock.

3. Right. I know some people now have quite varied opinions and understandings of banks and their safety, just wanted to confirm what I thought.

And understood on UST and GSE stuff. When I looked, it looked like currently brokered CDs were paying better even after adjusting for taxation effects. It also has not escaped my notice that a lot of people here are [-]buying[/-] hoovering up 5.something% CDs.

It does seem from reading some other threads that it's not as simple as the highest yielding safe thing though. Liquidity risk, renewal rate risk, duration, credit quality, interest payment schedule, and taxation could all come into play. It seems that a lot of people who are actively managing these things have to make decisions [-]guesses[/-] about the future of interest rates and the economy to try to make the right call.

 

[SecondCor521]

I don't know much about your situation with investments. We keep all taxable bond index funds in deferred tax accounts like IRA and SEP-IRA.

For VBTLX--I was thinking about this chart. It's two versions of the same concept. And tweaks apply depending on your tax bracket.

I suppose this chart is more about comparing two investments, and one choice is more or less tax-efficient in taxable account(s).

Thanks for the reply.

This situation isn't mine, but one I'm involved with managing.

Your point is well taken. There's a lot going on that I left out to try to focus my questions. But to fill out the description a little more:

A. These funds are in taxable partly because they're excess RMDs that have been required to be taken and have accumulated unspent; no real way in the current situation to get them back into an IRA or other tax deferred situation.

B. One question I need to decide is how much of the taxable is "cash buffer" (I'm thinking about 1.5 to 2 years' expenses), and how much is just really part of the investment portfolio which happens to be in taxable. If it's really the latter, then I am thinking I should probably swap some $X of VBTLX in taxable for the same $X of a more tax efficient investment (like a stock index fund) in the traditional IRA. Same AA, but more efficient tax placement, which is I think your main point.

 

[target2019]

Thanks for the reply.

This situation isn't mine, but one I'm involved with managing.

Your point is well taken. There's a lot going on that I left out to try to focus my questions. But to fill out the description a little more:

A. These funds are in taxable partly because they're excess RMDs that have been required to be taken and have accumulated unspent; no real way in the current situation to get them back into an IRA or other tax deferred situation.

B. One question I need to decide is how much of the taxable is "cash buffer" (I'm thinking about 1.5 to 2 years' expenses), and how much is just really part of the investment portfolio which happens to be in taxable. If it's really the latter, then I am thinking I should probably swap some $X of VBTLX in taxable for the same $X of a more tax efficient investment (like a stock index fund) in the traditional IRA. Same AA, but more efficient tax placement, which is I think your main point.

Thanks for your patience.

I understand the excess cash from RMDs. When we managed in-laws situation, that occured. What we had was everything going to local bank checking. All of their income and expense transactions went through that one account.

People have different opinions about what is excess cash, and as you mentioned, what is a good buffer. If you leave too much, you miss interest earned on the excess amount.

We maintained a 6-12 month buffer, as I recall.

Since they already had some stocks in a brokerage, we invested in individual companies and ETF's to diversify what was there. Used JNJ, DUK, and SO with success. VTI total stock is a simpler option.

I did their taxes, and knew what choices made more sense.

 

[all4j]

It does seem from reading some other threads that it's not as simple as the highest yielding safe thing though. Liquidity risk, renewal rate risk, duration, credit quality, interest payment schedule, and taxation could all come into play. It seems that a lot of people who are actively managing these things have to make decisions [-]guesses[/-] about the future of interest rates and the economy to try to make the right call.

Interesting comments. I guess I’m more of a tops down investor. Look at portfolio, see what it needs, then find an asset to try & meet that need. Each asset will have risks & costs associated with that risk – regardless of whether I identify &/or acknowledge that risk. I want to do the best I can to get compensated for those risks/costs. Whether you call it a decision or a guess, uncertainty is certain & unavoidable. Considering that upfront allows me to avoid active managing!

You asked upthread for educational type resources & I’m assuming that is rhetorical. Ample good resources outside this echo chamber. But if nothing else, one could do worse than looking at the SVB situation as a case study. Management’s playbook may sound familiar in many places to those who have read many posts about bonds on this site!