Treasury Bond Fund

[ash]

I'm sure this question is rudimentary, but I'm new to investing in government bonds and am still trying to understand the various different options.

* I've got $90K that I wish to put into 30 year treasury bonds (currently sitting in a MM at Schwab)
* I probably am not interested in purchasing them directly from the government.
* I don't want to receive interest payments (I'd like the interest to be reinvested)
* Requires as little "management" on my side as possible

So, my question is, what should I invest in? Is there a bond fund that invests SOLELY in US Treasury Bonds, has a very low expense ratio and reinvests the interest payments automatically?

Thanks in advance.

 

[justin]

VUSTX - Vanguard Long-Term Treasury Fund Investor Shares

0.24% expense ratio. Interest payments can be automatically reinvested.

Average Maturity is 17 years.

About 99% govt bonds, and 1% agency bonds backed by full faith and credit of the US Government (good as govt bonds)


For More info:
http://flagship2.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0083&FundIntExt=INT


Note that the yield on short and intermediate term government bond funds at Vanguard are within 10 basis points of the yield on the long term bond fund. May not be the best time for long term bonds right now.

 

[brewer12345]

Since you mention Schwab (where a VG fund won't be available), check out TLT, an exchange-traded fund.

Just curious, why 30 year treasuries right now?

 

[ash]

brewer,

Thanks. TLT appears to be around 5 years old, so it's hard to gauge it's long term performance.

Would you agree with the fund description, that in the long run it should return at about the same rate as US Bonds (20+ year treasuries), minus fees? By way of example, extending out the current rate of 30 year treasuries (4.5%), is it reasonable to assume that on average I'd see something between 4-5% from this fund? It's performance over the past few years looks pretty poor, but I have no idea how the bond market has performed in general during that period.

"Just curious, why 30 year treasuries right now?"

As far as timing goes, I try not to speculate on timing at all (not within my area of expertise), however it doesn't look like a particularly good time with rates still rising. Is it the general market opinion that bonds will be a better deal in 6 months or so?

 

[TromboneAl]

I try not to speculate on timing at all (not within my area of expertise), however it doesn't look like a particularly good time with rates still rising.

Welcome, Ash.

No one knows whether rates will go up or down. Really. IIRC, everyone thought that rates were rising 2 years ago.

I recently moved to short term bonds, but only because they are returning almost the same rates as the longer term bonds, but with less risk.

 

[brewer12345]

Yes, TLT should return the same as the Lehman 20+ year treasury index minus fees.  After all, the fund is basically a pile of 20+ year treasury notes.

I still can't fathom why you would want a 30 year treasury.  The longer the maturity of the bond, the greater its price volatility (risk).  If we continue to see rates rise, the 30 year treasury will get hammered.  Unless you are pretty sure we will see rates drop, I would strongly suggest that you look at something like AGG instead.  It has a LOT less interest rate risk and about the same yield.

 

[ash]

brewer,

Are you implying that simply at this time a 30 year treasury is a bad idea, or that 30 year treasuries are always a poor choice (compared to shorter term treasury debt)?

I am trying to get about 15-20% of my portfolio into bonds, and am trying to achieve safety (hence US bonds) and simplicity, and am operating under the assumption that longer bonds yield higher returns (on average).

So...is your reluctance regarding long term bonds just a timing issue (eg. now is not a good time to buy a long term bond)?

Thanks for your help, as I said I'm new to bonds.

 

[brewer12345]

brewer,

Are you implying that simply at this time a 30 year treasury is a bad idea, or that 30 year treasuries are always a poor choice (compared to shorter term treasury debt)?

I am trying to get about 15-20% of my portfolio into bonds, and am trying to achieve safety (hence US bonds) and simplicity, and am operating under the assumption that longer bonds yield higher returns (on average).

So...is your reluctance regarding long term bonds just a timing issue (eg. now is not a good time to buy a long term bond)?

Thanks for your help, as I said I'm new to bonds.

I'd say that in general 30 year treasuries are a bad idea for retail investors AND now is specifically not a good time to buy 30 year treasuries. Its a good idea to have some bonds in your portfolio, but I would stick to shorter maturities. The research that I have seen suggests that investors who buy 30 year bonds are generally not compensated adequately for the higher levels of volatilitythe bonds bring. Certain kinds of institutions have a very good reason to buy such bonds, so they tend to be happy to pay up.

I also think its not a good time to buy such bonds right now. The US Treasury just announced they would resume selling new 30 year bonds after several years of not doing so, plus it is VERY not clear what direction rates will go. Add in the fact that you get paid about the same yield for a 2 year as you do for a 30 year bond, and its not a real attractive proposition unless you think we will be dropping into recession very shortly.

If you want simplicity, buy something like AGG. It covers just about all sectors of the investment grade bond world, so you get decent yield with modest risk, and it isn't very long average duration or maturity.

 

[haha]

So, my question is, what should I invest in? Is there a bond fund that invests SOLELY in US Treasury Bonds, has a very low expense ratio and reinvests the interest payments automatically?
Thanks in advance.

Wow, Ash, this is a bit like saying, " I have decided I want to be shot by a firing squad. What color uniforms should they wear?

Why not just cancel the shoot, and buy a 6 month T-bill? You"ll get a little better interest rate to boot!

Unless you expect the world to fall apart, do you really want to lend anyone, including the US government, $90,000 for 30 years? If this is a short term spec, and you are a betting man, go ahead. If not, the chances are 99 out of 100 that there will be times in the not too distant future when that bond will yield more.

Ha

 

[ash]

brewer,

Agreed. If the difference in interest rates is negligible then the shorter term seems like a no brainer. I didn't realize they were that close, but it certainly appears they are.

Thanks for the info.

-----------
Ha,

I have t bills as well for the short term/cash portion of my portfolio.

As far as the world falling apart, I expect the last entity able to make good on their debt will be the US Federal Government. As much as I hate them, they are the ones with the printing presses. If they're unable to pay up, I'll have bigger problems to worry about.

 

[Nords]

Are you implying that simply at this time a 30 year treasury is a bad idea, or that 30 year treasuries are always a poor choice (compared to shorter term treasury debt)?

A couple years ago I went to a Schwab dinner where they sell investments between the courses.

The man sitting next to me was in his 80s. In 1975 he had bought 30-year Treasuries at 9% and was looking for something else to invest them in when they matured. (The Schwab reps at the table were drooling into their napkins. The annuity salesman, in particular, looked like a raptor tracking a field mouse.) The guy said that he'd been pretty happy with 30-year Treausuries for the first couple years, but as the decade closed out he was extremely not happy at giving the govt his money and watching the Treasuries earn less than inflation. (Heck, I had a checking account paying 10% interest in the early '80s.) Pretty soon interest rates were almost double the yield on his Treasuries, and they were worth so little that he basically put them away and forgot about them until the mid-'90s. They were a little better then, but they only became a good deal as the millenium approached.

He kept saying "I've waited 30 years for this, and I can't wait much longer."

 

[TromboneAl]

Click here for an brief article on this topic.

For your bond investments, consider sticking with U.S. government bonds that are non-callable and have maturities ranging from one to five years. That's the upshot of research by two executives of McLean Asset Management Corp., in Virginia.
Alejandro Murguia, Ph.D., director of investment research, and Dean T. Umemoto, CFP, president, say it's tempting to invest in longer-term bonds. After all, long-term bonds typically pay significantly more interest than shorter-term bonds.

However, there's good reason for this. When interest rates rise, a bond loses principal if you go to sell it. The longer the bond term, the more you risk losing in a rising-rate environment.