Maybe time to buy bonds back?

[daylatedollarshort]

Food for thought - one year Treasuries are at 3.15% with no potential loss of principal if you hold to maturity and are government guaranteed. TIPS have real yields of up to 1% over inflation lately, which was 9.1% on the last CPI report. Just sayin.

 

[bpgdeg1234]

Food for thought - one year Treasuries are at 3.15% with no potential loss of principal if you hold to maturity and are government guaranteed. TIPS have real yields of up to 1% over inflation lately, which was 9.1% on the last CPI report. Just sayin.

So which would you personally advocate?

 

[daylatedollarshort]

So which would you personally advocate?

I have been buying both this year. I'm dollar cost averaging TIPS again now that they have real yields. I switched my bond funds to a shorter term Treasury ladder earlier in the year before the Fed started implementing the interest rate hikes. As the Treasury rungs mature I'm using some of the money for TIPS and the rest will go back into the ladder. I'm wary of buying long term nominal bonds because the real interest rates, even at 4 - 5% on nominal bonds, is still negative with inflation running at 9.1%. If we get deflation then the nominal bonds are a good bet, but in my mind with inflation at 9.1% that is too big of an "if" for me to bet on just yet.

 

[Lsbcal]

Here are yesterday's TIPS rates:

................5yr....7yr...10yr..20yr..30yr
07/19/2022 0.47 0.54 0.62 0.81 0.92

 

[daylatedollarshort]

Here are yesterday's TIPS rates:

................5yr....7yr...10yr..20yr..30yr
07/19/2022 0.47 0.54 0.62 0.81 0.92

Bloomberg has the 20 years at 1.14% today - United States Rates & Bonds - Bloomberg

 

[bpgdeg1234]

I have been buying both this year. I'm dollar cost averaging TIPS again now that they have real yields. I switched my bond funds to a shorter term Treasury ladder earlier in the year before the Fed started implementing the interest rate hikes. As the Treasury rungs mature I'm using some of the money for TIPS and the rest will go back into the ladder. I'm wary of buying long term nominal bonds because the real interest rates, even at 4 - 5% on nominal bonds, is still negative with inflation running at 9.1%. If we get deflation then the nominal bonds are a good bet, but in my mind with inflation at 9.1% that is too big of an "if" for me to bet on just yet.

Thanks for your perspective. Are you going with shorter term TIPS with your purchases?

 

[daylatedollarshort]

Thanks for your perspective. Are you going with shorter term TIPS with your purchases?

I was buying shorter term TIPS on the secondary market earlier in the year, though I lost interest when the prices and the minimum order quantities show way up. Now we are going back to dollar cost averaging at TIPS auctions with the real yield increases, and auction maturities go from 5 - 30 years.

A 1.33% real yield on TIPS provides a 4% safe withdrawal rate over 30 years, and the 20 years have been getting pretty close to that.

 

[leeg]

I am trying to understand SEC vs. distribution yield. I'm really having a hard time with this. I posted a link to this thread on Bogleheads, and I'm sharing the replies here:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=382848&newpost=6800722

(p.s. - I've been reading/lurking on this forum for many years - I tend to be active on Bogleheads)

 

[target2019]

I am trying to understand SEC vs. distribution yield. I'm really having a hard time with this. I posted a link to this thread on Bogleheads, and I'm sharing the replies here:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=382848&newpost=6800722

(p.s. - I've been reading/lurking on this forum for many years - I tend to be active on Bogleheads)

Did you post a question here?

I'm not going to wade through the replies to your questions there. I think that your difficulty now is understanding many replies that may or may not address your question.

There are different ways to measure yield, and each site highlights these in different ways. Maybe it will help to answer if you could point out one fund that you own.

 

[Lsbcal]

I am trying to understand SEC vs. distribution yield. I'm really having a hard time with this. I posted a link to this thread on Bogleheads, and I'm sharing the replies here:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=382848&newpost=6800722

(p.s. - I've been reading/lurking on this forum for many years - I tend to be active on Bogleheads)

I read through some of the comments there, thanks. Frankly the whole worry about this distinction (SEC vs distribution yield) leaves me cold. I do not want to become a bond expert. Just want to get a decent return with my lower risk portfolio component.

Example of my approach:
I use the monthly distribution to calculate the fund's monthly return i.e.
monthly return = (end_of_month_price + distribution)/begin_of_month_price

Then I use that with a data base that goes back to 1987. I actually then do some bond timing. When equities go below a certain moving average I move from short term investment grade (ST IG) to 5 year Treasuries. When equities pop above the moving average I go back to the short term IG fund. I also bump up my equity allocation by a small amount so the timing can be done with the ST IG rather then with intermediate bonds.

But right now I do not trust that the bond market is quiet normal as yields were driven down to extremes. So in early January I just moved from the ST IG to money market funds and recently switched those to 2 month Treasuries. Eventually I will go back to using the funds.

In summary I use the fund monthly returns (not SEC yields or distribution yields) in my data. The long term returns of my bond approach using data going back to 1987 is quite good.

 

[VanWinkle]

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.

-1

 

[COcheesehead]

I read through some of the comments there, thanks. Frankly the whole worry about this distinction (SEC vs distribution yield) leaves me cold. I do not want to become a bond expert. Just want to get a decent return with my lower risk portfolio component.

Example of my approach:
I use the monthly distribution to calculate the fund's monthly return i.e.
monthly return = (end_of_month_price + distribution)/begin_of_month_price

Then I use that with a data base that goes back to 1987. I actually then do some bond timing. When equities go below a certain moving average I move from short term investment grade (ST IG) to 5 year Treasuries. When equities pop above the moving average I go back to the short term IG fund. I also bump up my equity allocation by a small amount so the timing can be done with the ST IG rather then with intermediate bonds.

But right now I do not trust that the bond market is quiet normal as yields were driven down to extremes. So in early January I just moved from the ST IG to money market funds and recently switched those to 2 month Treasuries. Eventually I will go back to using the funds.

In summary I use the fund monthly returns (not SEC yields or distribution yields) in my data. The long term returns of my bond approach using data going back to 1987 is quite good.

Keep in mind bond fund distributions are not equal each month and can vary quite a bit. So depending on when you calculate your return, it can look better or worse.
I use a bond ladder and have substantially more income, almost 5 times more, in June and December than say April and October. If I calculated my return in a high vs low month, it would provide a dramatically different number.

 

[Lsbcal]

Keep in mind bond fund distributions are not equal each month and can vary quite a bit. So depending on when you calculate your return, it can look better or worse.
I use a bond ladder and have substantially more income, almost 5 times more, in June and December than say April and October. If I calculated my return in a high vs low month, it would provide a dramatically different number.

I calculate the monthly returns using the monthly distribution. So this is a month to month effort. I don't worry about monthly income, just total return over extended periods.

 

[Freedom56]

I am trying to understand SEC vs. distribution yield. I'm really having a hard time with this. I posted a link to this thread on Bogleheads, and I'm sharing the replies here:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=382848&newpost=6800722

(p.s. - I've been reading/lurking on this forum for many years - I tend to be active on Bogleheads)

What those Bozoheads don't understand is that bonds funds are not stock funds. Bonds mature or are called at par (I am not talking about convertible bonds). They don't understand that bonds are instruments for generating income. They obviously don't exercise any common sense. Nobody bothers to ask why would anyone invest new money into a bond fund with distribution yields and even SEC yields lower than CDs or individual corporate bonds where their capital is returned 100% at maturity while earning higher income? Bond funds are extremely efficient at "losing other peoples money". They really are. Here is a good example on how they do it. (I own this bond and bought some more recently).

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C642369

This bond from Ally financial was originally issued on 11/17/15 at 5.88% at $99.06 and has a coupon of 5.75% and matures 11/17/25. For for the buyer of this original 10 year note a $99,060 original investment returns $100,000 principal at maturity plus $5,750 annual coupon payments totaling $57,500 after 10 years. But after the bond was issued, funds bid the bond up above par in 2015 (funds buying high) and during a period of a market sell-off sold this bond just months later at a loss down to about $94 (funds selling low). Then funds bid this bond back up to about $110 (funds buying high) in 2016 and sold it off below par once again in 2016 (funds selling low). This pattern repeats over and over again but in 2020 the losses were staggering when funds sold this bond all the way down to $82 (fund selling low) in March 2020 and quickly bid this back up to a whopping $116 (funds buying high) by the end of 2020. From the end of 2020 to the end of 2021 bond funds continued to buy high and then in 2022 with the rate hike cycle started selling low once again and it dropped below par once again and now they are bidding it back up. So while the individual bond holder has been enjoying as pretty decent return watching this roller coaster ride bond fund holders have been losing over and over again. The math is very simple. You can't buy high and sell low an asset that has a predetermined fixed value at maturity and expect to outperform the individual bond holder. I and other fixed income investors take advantage of this predictable buying and selling by bond funds.

YOU BOUGHT ALLY FINL INC NOTE 5.75000% 11/20/2025 (Cash)
Symbol 02005NBF6
Description ALLY FINL INC NOTE 5.75000% 11/20/2025
Shares + 50,000.000
Price 98.24
Amount -$49,327.64
Interest $207.64
Settlement Date 06/16/2022

So my $49,327.64 investment in 2022 in this bond will return $50,000 capital on 10/20/2025 and 7 coupon payments of $1437.50 for a total of $10,065.50. Find me a Vanguard bond fund that can match that performance with my capital secured. There is no basis for arguing the math. Those Bozoheads can believe what they want, but you can't fight the math. They have the right to their misguided investment beliefs. I even applaud their misguided beliefs and without them we wouldn't have this bond price roller coaster that I and others hop onto when they "sell low".

 

[daylatedollarshort]

Nobody bothers to ask why would anyone invest new money into a bond fund with distribution yields and even SEC yields lower than CDs or individual corporate bonds where their capital is returned 100% at maturity while earning higher income?...There is no basis for arguing the math. Those Bozoheads can believe what they want, but you can't fight the math. They have the right to their misguided investment beliefs. I even applaud their misguided beliefs and without them we wouldn't have this bond price roller coaster that I and others hop onto when they "sell low".

Michael Burry (The Big Short guy) has a quote for that - People want an authority to tell them how to value things, but they choose this authority not based on facts or results. They choose it because it feels authoritative and familiar.

When posters here write about how they are going to come our ahead with their bond funds in 8 years, I always ask them to show the math facts on that, and so far no one has. I have laid out the math with my investor A and B scenarios in past posts, but you have done a better job by simply pointing out, "why would anyone invest new money into a bond fund with distribution yields and even SEC yields lower than CDs or individual corporate bonds where their capital is returned 100% at maturity while earning higher income?"

 

[foxfirev5]

Michael Burry (The Big Short guy) has a quote for that - People want an authority to tell them how to value things, but they choose this authority not based on facts or results. They choose it because it feels authoritative and familiar.

When posters here write about how they are going to come our ahead with their bond funds in 8 years, I always ask them to show the math facts on that, and so far no one has. I have laid out the math with my investor A and B scenarios in past posts, but you have done a better job by simply pointing out, "why would anyone invest new money into a bond fund with distribution yields and even SEC yields lower than CDs or individual corporate bonds where their capital is returned 100% at maturity while earning higher income?"

Exactly. When I asked the same question on Bogleheads years ago I got no response. Then I knew I was on to something. Now I easily run ST and LT ladders of CD's and Treasuries which should see me to my end of plan.

 

[NW-Bound]

This bond from Ally financial was originally issued on 11/17/15 at 5.88% at $99.06 and has a coupon of 5.75% and matures 11/17/25. For for the buyer of this original 10 year note a $99,060 original investment returns $100,000 principal at maturity plus $5,750 annual coupon payments totaling $57,500 after 10 years. But after the bond was issued, funds bid the bond up above par in 2015 (funds buying high) and during a period of a market sell-off sold this bond just months later at a loss down to about $94 (funds selling low). Then funds bid this bond back up to about $110 (funds buying high) in 2016 and sold it off below par once again in 2016 (funds selling low). This pattern repeats over and over again but in 2020 the losses were staggering when funds sold this bond all the way down to $82 (fund selling low) in March 2020 and quickly bid this back up to a whopping $116 (funds buying high) by the end of 2020. From the end of 2020 to the end of 2021 bond funds continued to buy high and then in 2022 with the rate hike cycle started selling low once again and it dropped below par once again and now they are bidding it back up. So while the individual bond holder has been enjoying as pretty decent return watching this roller coaster ride bond fund holders have been losing over and over again. The math is very simple. You can't buy high and sell low an asset that has a predetermined fixed value at maturity and expect to outperform the individual bond holder. I and other fixed income investors take advantage of this predictable buying and selling by bond funds...

Not a bond investor, nor having much in bonds (whatever I have is mostly in balanced MFs, which are also a small percentage of portfolio), I wonder if bond funds buys/sells are driven by their shareholders going in/out.

This effect of shareholders pumping/deflating holdings of stock MFs is very real, and lamented by MF managers. Hence, I wonder if bond funds get the same detrimental driving factor.

The managers are not stupid, but they have no choice when people redeem their shares. Sell low to raise cash for redemption is what they have to do. On the other hand, hedge funds can restrict redemption, so that the managers can have a bit more power in making longer-term decisions.

 

[COcheesehead]

Exactly. When I asked the same question on Bogleheads years ago I got no response. Then I knew I was on to something. Now I easily run ST and LT ladders of CD's and Treasuries which should see me to my end of plan.

Yep, individual bonds give you precision, capital preservation and income.

 

[Freedom56]

Not a bond investor, nor having much in bonds (whatever I have is mostly in balanced MFs, which are also a small percentage of portfolio), I wonder if bond funds buys/sells are driven by their shareholders going in/out.

This effect of shareholders pumping/deflating holdings of stock MFs is very real, and lamented by MF managers. Hence, I wonder if bond funds get the same detrimental driving factor.

The managers are not stupid, but they have no choice when people redeem their shares. Sell low to raise cash for redemption is what they have to do. On the other hand, hedge funds can restrict redemption, so that the managers can have a bit more power in making longer-term decisions.

Passive bond funds/ETFs like stock funds/ETFs have no choice but to sell when investors redeem their shares. A bond investor can take advantage of that reality and time their purchases.

 

[Freedom56]

When posters here write about how they are going to come our ahead with their bond funds in 8 years, I always ask them to show the math facts on that, and so far no one has. I have laid out the math with my investor A and B scenarios in past posts, but you have done a better job by simply pointing out, "why would anyone invest new money into a bond fund with distribution yields and even SEC yields lower than CDs or individual corporate bonds where their capital is returned 100% at maturity while earning higher income?"

Despite the low math scores in this country, you still can't can't fight common sense.

 

[Graybeard]

I am trying to understand SEC vs. distribution yield. I'm really having a hard time with this. I posted a link to this thread on Bogleheads, and I'm sharing the replies here:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=382848&newpost=6800722

(p.s. - I've been reading/lurking on this forum for many years - I tend to be active on Bogleheads)

Here's a description of SEC vs Distribution yield.
https://obliviousinvestor.com/distribution-yield-vs-sec-yield-which-is-more-useful/