Bonds: Simple vs Complicated

[Lsbcal]

When has MBS dragged down Total Bond Mkt? Is this a worry going forward that has not yet asserted itself in recent decades? I recall Swedroe didn't like Total Bond Mkt and I think it was because of the MBS holdings.

My holdings are vfidx and vcobx in intermediate IG. Also have ibond and short term IG. It looks like vcobx has 23% MBS.

When I look at a long term chart of VBTLX (total bond mkt) versus VFITX (intermediate Treasury) I don't see any sustained period of underperformance for VBTLX. In the period April 2004 to June 2006 (when 5yr Treasuries rose a lot) VBTLX outperformed VFITX.

 

[brewer12345]

What is your FI duration? Ours (35% TBM + 5% CASH) = 4.9 yr.

My FI is I discrete chunks. Some is in I bonds and CDs which have a duration of approximately zero (can surrender any time for a nominal penalty). A hunk is in a global bond fund with a duration of 1 and change. Some is cash. A smaller amount is in a TIPS CEF with a 5ish duration and a modest slug is in traditional bond aggregate funds as part of a target allocation fund in a retirement plan where the allocation fund is the best option. So I would say my duration is probably between 1 and 2 in total, and very little of it have negative convexity risk.


I am probably net zero or negative duration since we still have a modestly-sized 30 year fixed rate mortgage that I will likely never prepay.

 

[audreyh1]

When has MBS dragged down Total Bond Mkt? Is this a worry going forward that has not yet asserted itself in recent decades? I recall Swedroe didn't like Total Bond Mkt and I think it was because of the MBS holdings.

My holdings are vfidx and vcobx in intermediate IG. Also have ibond and short term IG. It looks like vcobx has 23% MBS.

When I look at a long term chart of VBTLX (total bond mkt) versus VFITX (intermediate Treasury) I don't see any sustained period of underperformance for VBTLX. In the period April 2004 to June 2006 (when 5yr Treasuries rose a lot) VBTLX outperformed VFITX.

I thought Swedroe didn't like total bond market because of the huge slug of US treasuries. I don't remember him complaining about MBS.

 

[Gotadimple]

I thought Swedroe didn't like total bond market because of the huge slug of US treasuries.

He doesn't. I used his suggestions to create a slice and dice. That doesn't mean I don't have Treasuries - just in a portfolio where I can control the individual asset.

Rita

 

[audreyh1]

A little further research and I see that Swedroe did complain about MBS holdings of TBM way back before 2009 according to this Bogleheads post

by JohnL928 » Wed May 06, 2009 8:01 am

As a boglehead newbie, I started reading the books and forums. Last night while reading Larry Swedroe's book "The Only Guide to a Winning Investment Strategy You'll Ever Need" I came upon his statement to avoid Vanguard Total Bond Fund because of its 1/3 allocation to Mortgage Backed Securities and duration of treasuries and corporate bonds. The forums seem like most bogleheads are recommending the Total Bond Fund for bond allocation. Am I reading this correctly?
John

It's actually been Bogle who has complained the past few years about too many treasuries in TBM.

 

[MooreBonds]

My FI is I discrete chunks. Some is in I bonds and CDs which have a duration of approximately zero (can surrender any time for a nominal penalty).

Wouldn't I-bonds actually have a negative duration? As interest rates rise (and the typically associated increase in inflation, to some extent), the value of I-bonds would increase. Not because of higher rates, but because of the likely higher inflation.

 

[brewer12345]

Wouldn't I-bonds actually have a negative duration? As interest rates rise (and the typically associated increase in inflation, to some extent), the value of I-bonds would increase. Not because of higher rates, but because of the likely higher inflation.

They behave like a floating rate TIPS redeemable at par only. Close enough to cash for me to call it a zero duration.

 

[Big_Hitter]

IIRC, according to Fabozzi (editor of the handbook of FI Securities), "duration" is the percentage change in the price of a FI security with respect to a 100 bip change in yield. (This is why I dislike the use of the words "duration" and "years" in the same sentence.)

So I don't think Ibonds have a negative duration, ,well technically anyway.