Is Now The Time for 2 YR Treasury Bond Funds...for Cash?

[yogibearbull]

Obviously, YTM or 30-day SEC yield (that is a special YTM calculation) is NOT distribution yield. Term yield can have various meanings. 

May be the thread had outlived its usefulness and bickering is all that remains.

[Fearchar]

Jul 31, 2022 14:08:59 GMT chang said:

Jul 31, 2022 13:08:42 GMT Fearchar said:

I put together the following comparison chart:

View Attachment

Note for RPHIX (duration 0.52 yrs):
============================
YTD           0.97% (M* as of 7/29)
1YR           1.73% (M* as of 7/29)
10yr          2.58% (M* as of 7/29)
Inception   2.78% (as of 6/30)
SEC Yield   2.37% (Vanguard stat as of 6/30)

chang;

...  and RPHIX is closed to new investors.

It's wonderful that you have access to this fund, but for some of us it's not an option.

[roi2020]

The RPHIX Summary Prospectus (dated 01/26/22) states that new shareholders may purchase shares directly via the Fund.

"Sales of Retail and Institutional Class Shares of the Fund are closed to new investors except as noted below.
 Existing shareholders of the Fund and certain eligible investors may purchase additional shares of the Fund
 through existing or new accounts and may reinvest dividends and capital gains distributions.
 New shareholders may open Fund accounts and purchase shares directly from the Fund (i.e., not through a financial intermediary)."

[Fearchar]

Jul 31, 2022 15:26:48 GMT mozart522 said:

Jul 31, 2022 15:03:35 GMT @slooow said:

M - maybe I am looking at this wrong? I looked at a 5 day 6 mo treasury chart and it seemed like a fairly large drop for a "safe asset". I was thinking it coul$ just as easily shoot up in this market. I will look at shorter durations.

ok, but it doesn't matter what the day to day does, if you buy a 3%, 6 month t-bill you will get that in 6 months for sure.  It is safe because the assumption is one will hold it to maturity.  If you are suggesting that the 6 month may be higher, say 4% in 2-3 months, then you may want to go shorter and possibly buy then.  But it is a bet.

  

Thanks mozart;

Just checked and here are the shortest durations listed on my platform.
And you're correct; sure beats a MM>

[fishingrod]

I find buying individual bonds as a compromise. One needs to be willing to accept what you get, instead of hoping for more, or trying for more that may or may not happen.

This is a good thing if one can accept it. It also helps if it is acceptable/desirable and it meets your needs.

I know this is a simple concept, but for some it is a pill to swallow.

[FD1000]

I agree with everything Mozart said. If you buy 6 months treasury and hold 6 months, you will get what was promised. No risk.

R48, yield is only the monthly distributions which is part of the total return. It's a guarantee you will get something every month. The other portion isn't. When rates go up, VGSH probably lose money, especially VGSH with high correlation to rates. Rates happened to go down because the markets believed the Fed blinked. But, if inflation persiss, the Fed will continue raising rates, the 2 year will follow, and VGSH will go down. You don't need to be surprised or gamble.

You know exactly how much you will make with treasury for 6-12-24 months. If I want to hold only 6-12 months and get a guarantee 2.8-3% on a yearly basis, only treasury has this nice option. You have to hold VGSH 2 years and hope the rule of thumb works. If you want to make more short term, you got to have great timing with VGSH.

But, as I said before, I use my good timing with HY munis to make so much more. A good trader doesn't waste her time on peanuts.

[retiredat48]

Jul 31, 2022 16:25:51 GMT @haven said:

Jul 31, 2022 15:48:10 GMT retiredat48 said:

FD posted: "VGSH doesn't yield 3%, based on the last dist=0.056+NAV=59 and if it stayed the same in the next 12 months you will get about 1.1% yield. The 30 day sec = 3+% but that's potential not actual and may never get there."

To me, this is a complete misrepresentation. You get total return from the distribution dollars, and the daily accrued increase in NAV price as bonds that are below par, mature, and are redeemed. The SEC does not casually give yields that are non-existant. In fact, most of the time the SEC yield is below the M* published yields. So a 3% SEC yield has value...and an expectation.

I'm off to the gym...more tonight on the Bond Rule of Thumb, since many do not trust it.

R48



There was a major discussion on the Bond Rule of Thumb on M* years ago -  Vanguard article, assumptions, limited applications...



R48 reply in bold...really? 

Oh, now I recall...I was the center of attention on a contentious thread that resulted in people like Capecod getting suspended, etc.  Hundreds of posts.

I plan to shortly post some of the various studies conclusions, etc, confirming the rule of thumb.

R48

[retiredat48]

Why not...here's one of my archived posts on the Bond Rule of Thumb.  I have in library Jack Bogle's Study on this, confirming it...but I cannot locate it.  But to illustrate how Vanguard uses this rule, here is correspondance from Vanguard:

For the past couple of years, there's been speculation about when the Federal Reserve Bank will start to raise interest rates. While the economy continues to improve, wage increases have lagged behind, which is causing the Fed to be cautious in its approach.

Since there have been so many news reports about how the impending rate hike will affect investments, I wanted to share Vanguard's thoughts on the rising-rate environment.

What do rising interest rates mean for your portfolio?
According to Joseph Davis, our chief economist and global head of Vanguard Investment Strategy Group, "The bond market is already expecting a rise in rates, which is why long-term interest rates are higher today than short-term rates." And when it comes to how best to react to a rising-rate environment, Mr. Davis said to "… think about your portfolio construction and your asset allocation, regardless of where the markets may go, and think longer term …" Mr. Davis also said that bonds generally tend to be less volatile than stocks, which helps lower risk and keep a portfolio diversified.

A rule of thumb for fixed income investors is that if your time horizon is longer than a bond's duration, you stand to benefit from rising interest rates. When interest rates rise, bond prices fall, which will result in short-term losses. But those losses will be offset by higher returns on reinvested income into higher-yielding bonds. In any environment, it's important to stay focused on your long-term goals, maintain the right mix of diversified stocks and bonds, and rebalance your portfolio when necessary.

If you'd like to talk more about this topic or anything else that's on your mind, feel free to email me or schedule an appointment. If you'd like to schedule an appointment, you can use our online appointment scheduler to choose a convenient time to speak. Simply log on to your account at vanguard.com, locate my contact information on the right side of the page, and select Create/edit appointment under my name to choose a date and time for me to call you.

Thank you for your continued confidence and for investing with us.

Sincerely,


Registered Representative
Vanguard Flagship Services

---------------------------------------------------------

R48

[retiredat48]

From another Morningstar post...evidence supporting bond rule of thumb:

---------------------------------------------------------------------

"R48 reply:  Now, regarding this Rule of Thumb. The scenarios you describe, rising interest rates, has been backtested often. We have certainlyy had rising rate environments in the past. I repeat, bond funds year over year suffer (small losses) about once every 40 years. Over five years, about NEVER.

But I don't think anyone should take the Rule of Thumb from me. Count my input as zero. For all of my investing techniques and tools, I cite a host of guru references. And regarding poster "elder" who cites a long thread a couple years back. If you review that thread carefully, and follow later threads on the Rule, you will see that many posters now acknowledge the Rule exists, is generally on target, and is in industry-wide practice. I could name names.

Here is just one excerpt from backtesters, by RAfI/PIMCO'S Robert Arnott, who did a lot of work with rising rates with Emerging Market Bonds. Key here is EM bonds have huge rates swings ( not tiny 3/8% point changes). Arnott is a well recognized bond manager guru, who is also noted for his extensive backtesting and studies on investing.


Arnott provides a comparison, for the past two decades that the JP Morgan Emerging Market Bond Index was created, of total annual returns five years later, for all of the initial starting yields. Here are some snippets:

"Arnott: Let's look at Emerging Market Bonds, which have been a fairly consistent exposure to All Asset strategies...The JP Morgan EM Bond Index posted its second worst quarter since 1997 with a return of -6.3%. But this tells us little about long term performance...Figure 1 shows the starting yield to maturity of the JP Morgan EM Bond Index (the dark blue line) and the five year subsequent return from that starting yield (the dark blue line) from the inception of the index 1994 through 2013. Obviously this 20 year stretch covers the good, the bad and the ugly of EM bond investing.
What do we find? Our starting yield very closely approximates the return we can expect over the next five years--the correlations run at 87%."

-----------------------------------------------------------

Continuing...another RECENT example: Here's from Vanguard Income Strategy Group:

"A rule of thumb for fixed income investors is that if your time horizon is longer than a bond's duration, you stand to benefit from rising interest rates. When interest rates rise, bond prices fall, which will result in short-term losses. But those losses will be offset by higher returns on reinvested income into higher-yielding bonds. In any environment, it's important to stay focused on your long-term goals, maintain the right mix of diversified stocks and bonds, and rebalance your portfolio when necessary".
"

---------------------------------------------------------

Lastly, just for fun, here's what Daniel Weiner Newsletter, who did some backtesting, wrote on their results:

Can the yield on a bond fund accurately predict how that fund will perform over the next five to ten years? Some, including one of Vanguard's bond pros, say it can.
It's an interesting theory, and one that I've heard repeated a number of times over the years, most recently in a live Webcast that Vanguard hosted near the end of January.
During the course of the discussion, Christopher Alwine, who manages the Vanguard Long-Term Tax-Exempt (VWLTX) and High-Yield Tax-Exempt (VWAHX) funds, mentioned in passing that a bond fund's current yield gives the "best estimate" of what you can expect it to return over the next five years.



This reminded me of a similar theory that Vanguard founder Jack Bogle has mentioned a number of times, which posits that a bond fund's yield is an excellent proxy for its return over the following ten years.


Since any investor would love to have a crystal ball in which to divine the future of his or her investments, I thought I'd investigate these theories and see if they hold up against real-world returns.


To test Bogle's and Alwine's assertions, I looked at month-end SEC yields for all of Vanguard's bond funds from November 1993 to January 2006, as well as the subsequent five- and ten-year returns for those funds. Simple subtraction (the return minus the yield) gives a fairly good idea of just how close a fund's yield comes to predicting its future return.
With enough historical data to look at 87 different ten-year periods and 147 different five-year periods for a majority of Vanguard's bond funds (some are too young), I think it's possible to come to some preliminary conclusions, at least. I should note that in all cases except one (High-Yield Corporate (

VWEAX)) the absolute yield and return numbers are in the mid-to-low single digits, so even 0.5% can be a pretty big difference.



What you'll see in the summary at the bottom is that Bogle is probably closer to being right than Alwine. Obviously, a bond fund's yield won't be a perfect crystal ball on the future, but the wider gap between the range of outcomes over five years versus those over ten years gives Bogle's back-of-the-envelope calculation a bit more validity.


This general rule that a fund's yield will predict its ten-year return far better than its five-year return seems to hold throughout the taxable and tax-exempt funds. The one other general observation is that, on average, the five-year returns were almost all slightly higher than the funds' yields would have suggested—


R48 closing: I have many, many references to the Rule of Thumb, as well as formal academic backtesting of same. The only place where some controversy exists is with a few certain M* Forum members.

The Rule of Thumb is one of the top ten tools I consider I have in my investing tool-box. Come to grips with this, conclude for yourself, and you may decide the same."

----------------------------------------------------------------------------------

R48

[FD1000]

I'll bite:

R48 quote: Lastly, just for fun, here's what Daniel Weiner Newsletter, who did some backtesting, wrote on their results:

Can the yield on a bond fund accurately predict how that fund will perform over the next five to ten years? Some, including one of Vanguard's bond pros, say it can. It's an interesting theory, and one that I've heard repeated a number of times over the years, most recently in a live Webcast that Vanguard hosted near the end of January.

During the course of the discussion, Christopher Alwine, who manages the Vanguard Long-Term Tax-Exempt (VWLTX) and High-Yield Tax-Exempt (VWAHX) funds, mentioned in passing that a bond fund's current yield gives the "best estimate" of what you can expect it to return over the next five years.

FD: Treasuries are the best to follow the "rule". The further you go, the less accurate it gets. I found that even BND(US Tot index) was off. Generally, bonds don't do much, so you can claim it works...example: if the yield is 3% and you made 2.5%, you can say close enough but actually you will be off by 16.7%.
Vanguard has some of the highest rating bonds in different categories and why it's close.

Quote: Arnott: Let's look at Emerging Market Bonds, which have been a fairly consistent exposure to All Asset strategies.

FD: The above definitely didn't always work. EM bond funds have (IG + HY) bonds from several countries + Dollar exposure.

=======

The above doesn't change a bit what I posted before. If I want a guarantee to make 2.8%(on an annual basis) for 6 months or 3% for 12 months, treasuries/CD can do it, VGSH can't guarantee it, while volatility is crazy at 1-1.5%.  Easy choice.
The rest is timing, I prefer to time much better potential performance which I actually achieved.

[retiredat48]

FD1000,...I posted this stuff on the bond rule of thumb for others...you have rehashed this several times over the years.

I notice you keep saying "the rest is market timing." Like, I did well with VSGH purchase due to good market timing. Duh, your posted investing results all include your market timing...in and out...back and forth...and when. And sometimes looking backwards.

Anyway, I cannot spend my remaining lifetime debating these things with you. So I will not be replying to any more of your replies.

BTW For those who are keenly interested in things like bond bubbles, and learning about bonds,here is an excellent thread by poster nisiprius on the Boglehead.org forum:


www.bogleheads.org/forum/viewtopic.php?t=57313&mrr=1278467602

R48

[FD1000]

Aug 1, 2022 15:46:57 GMT retiredat48 said:

FD1000 ,...I posted this stuff on the bond rule of thumb for others...you have rehashed this several times over the years.

I notice you keep saying "the rest is market timing." Like, I did well with VSGH purchase due to good market timing. Duh, your posted investing results all include your market timing...in and out...back and forth...and when. And sometimes looking backwards.

Anyway, I cannot spend my remaining lifetime debating these things with you. So I will not be replying to any more of your replies.

BTW For those who are keenly interested in things like bond bubbles, and learning about bonds,here is an excellent thread by poster nisiprius on the Boglehead.org forum:


www.bogleheads.org/forum/viewtopic.php?t=57313&mrr=1278467602

R48

When I discuss what I do, it's all about bond OEFs trades which can last days to weeks, no secret here.

This thread is about finding better options than MM to hold for months, actually you posted about holding a year "Like, I'll take the 2.16% interest for a year, and live with a floating fund price."

I said to wait, the price of VGSH collapsed 1.5% which is huge for ST bonds. When treasuries hit 3% for one year in mid June, the game was over for most investors, treasuries is the bird in the hand, a guarantee return with no risk. Someone who looks for a better option than MM, looks for a guarantee, not a trade and MAYBE a better performance.

I agree with you on many things, not on this one.

[Deleted]

I don't know about anybody else, but with inflation where it is, darn tooting I'm hoping for some better performance too in addition to yield. I'm looking at CEFs now, looking at fixed income options and not finding them a place I want to be. This whole conversation is pushing me back to my comfort zone of dividend stocks. Cheers to all.

Thanks for the BH link R48.

[FD1000]

Aug 1, 2022 16:15:14 GMT @slooow said:

I don't know about anybody else, but with inflation where it is, darn tooting I'm hoping for some better performance too in addition to yield. I'm looking at CEFs now, looking at fixed income options and not finding them a place I want to be. This whole conversation is pushing me back to my comfort zone of dividend stocks. Cheers to all.

Thanks for the BH link R48.

If you are comfortable with 20% swings, why settle with bond OEFs? 
Leveraged FI CEFs proved to be as volatile as stocks, with lower performance in the last several years.

I think you should sticks with stocks, you have done it for years and comfortable. You can find all you need from performance to high dividends and stocks are discussed and recommended by the best experts for decades. When Siegel starts talking about CEFs, start investing in them.

[retiredat48]

Aug 1, 2022 16:15:14 GMT @slooow said:

I don't know about anybody else, but with inflation where it is, darn tooting I'm hoping for some better performance too in addition to yield. I'm looking at CEFs now, looking at fixed income options and not finding them a place I want to be. This whole conversation is pushing me back to my comfort zone of dividend stocks. Cheers to all.

Thanks for the BH link R48.

Sara...my bold added above.

Of course you can go to dividend stocks for all of it.

But you posted (and I was preparing a reply) asking: "What do you think of a bond ladder at 6 month intervals for cash needed in a year? Or wait to see if rates rise on an etf like VGSH? Back to the beginning I guess."

But, if you need cash in a year, are dividend stocks too risky?  Surely could fall 20% by then.  But short term bond funds will not.

I don't understand a 6 month bond ladder, for savings to be withdrawn in a year.  You would buy 50% of monies now in 6 month treasuries, then the balance in 6 months?  This doesn't make sense, so I am probably missing something. 

A one year treasury is just not risky.  Hold one year, redeem, collect your interest, spend or use the cash.  Albeit one year interest is below 2 yr treasury now.

None of these short term selections are risky; I just consider the two year treasury to be the sweet spot for now.  Use the investment vehicle of choice.

Hey, where did that 2 yr treasury bond go?  Oh, there it is, gone up in price as the 2 yr rates keep falling.  If it gets to 2.5% and I (opportunistically) sell VGSH, please don't anyone accuse me of market timing.

Key point is it took 33 years for treasuries to go from 15+%, to 2.5%.  That was not done in a straight line.  Treasuries fluctuate all the time...sine wave stuff.  Creates opportunities.

Also, the recent fast drop in prices (increasing yields) was reportedly the fastest in history.  Don't make investment policy or strategy on this repeating soon.  Further, movements off of zero rates brings CONVEXITY into play, a math feature that accentuated the NAV price moves.  That risk is gone also.  Prepare for more normal times in the bond world.

R48

[Deleted]

Thanks R48. I think the 2 year could get to 2.5%. I hear you on the time it took to get to 2.5%. I obviously agree about the risk in the short term for equities. Yes - you are correct about the 6 month ladder length. My planning timeline is 1 to 2 years. But, I am willing to take a little risk with inflation where it is instead of continued negative return.

Edit - With regard to the bond ladder - I was thinking of this as a way in general to hold cash. Not just for what I need in a year or 2.

[Capital]

I've been following here even though I am only currently investing in 3-month Treasuries.
When looking at Treasuries and (FDIC Insured) Brokerage CDs I consider them one in the same.
Looking at yields on my Fidelity account I see 2-year Treasuries yielding 288pb and 2-year Brokerage CDs at 345bp - I would choose CDs at this maturity.
Just wonder if others here look at CDs and Treasuries the same way or if I'm off base in my thinking.

Not wanting to completely hy-jack this thread.

[FD1000]

Aug 1, 2022 22:50:07 GMT Capital said:

I've been following here even though I am only currently investing in 3-month Treasuries.
When looking at Treasuries and (FDIC Insured) Brokerage CDs I consider them one in the same.
Looking at yields on my Fidelity account I see 2-year Treasuries yielding 288pb and 2-year Brokerage CDs at 345bp - I would choose CDs at this maturity.
Just wonder if others here look at CDs and Treasuries the same way or if I'm off base in my thinking.

Not wanting to completely hy-jack this thread.

I don't like locking too long, the sweet spot is at 6-12 months.

Fidelity MM already pays 1.9% on FZDXX.

Attachments:

[Chahta]

Aug 1, 2022 22:50:07 GMT Capital said:

I've been following here even though I am only currently investing in 3-month Treasuries.
When looking at Treasuries and (FDIC Insured) Brokerage CDs I consider them one in the same.
Looking at yields on my Fidelity account I see 2-year Treasuries yielding 288pb and 2-year Brokerage CDs at 345bp - I would choose CDs at this maturity.
Just wonder if others here look at CDs and Treasuries the same way or if I'm off base in my thinking.

Not wanting to completely hy-jack this thread.

I sold a 3 mo Treaasury a couple of months back, before it matured, so I could get a better newer rate. Made a few bucks. Can't do that with CDs.

[FD1000]

Rates are going higher, VGSH goes lower. If you bought since the OP, on March 23 and in the next 10 weeks, you made no money or lost money for 3-4 months. This includes all the distributions. I never invest based on predicting rates moves months ahead, because it's unknown, and this unique market conditions are tricky.

The chart below doesn't include today's price, I added it in red.

Treasuries for 6-9-12 months pay over 3%. 

The 2 year treasury rates are still in uptrend.

Attachments:

[Chahta]

Time for 2 year treasury funds? Whoops.

[marquay]

I plan of buying at Fidelity at Auction for 1 year 3.22%

[Fearchar]

[retiredat48]

Interesting that the treasury rates, incl 2 yr, are so volatile, making 25 bp swings in a few hours.

Of course, I could value VGSH a week ago at the relative low in rates, saying I did well, but chose not to then. Now we have a fast upswing in rates...must be a lot of short sellers getting squeezed etc, for narratives to change this fast. The jobs report has many meanings.

I have a side bet fed will NOT go 75 basis points rise in Sept. Takers?

If/when the fed gets to 3-3.25%, it will stabilize there for awhile, and I expect the 2 yr to fluctuate from 2.7% to 3.5% in yield. There will be times to exit at favorable conditions if one desires.

But it doesn't matter. Higher two year treasury yield, the more income on next bond purchases VGSH will get, on redeemed bonds. Thus divy grows; ditto if rates go to 2.5%...lower yields to distribute on rollovers etc. It all comes out the same in the end...the bond rule of thumb.

R48

[fishingrod]

retiredat48 ,
"I have a side bet fed will NOT go 75 basis points rise in Sept. Takers?"
____________________________________________________________________________________________________________

You will be betting against the market. It is at 72.5% right now predicted chance of .75BPS in Sept.

www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

I am already in for a ice cream cone. And not a cheap one either.

What makes you think they will be slow to raise?

I believe the sharp uptick in rates is because of the jobs report. Still raging along.

I have read several articles on how the Phillips curve is broken, but I think it will apply on the way down.

[Deleted]

I think they probably shouldn't raise to .75, but wouldn't bet on if they will or not. Inflation is decreasing. What is already in the system can't be stemmed. All that increase in housing has yet to be reflected fully in the CPI numbers. But, are current housing and rents still increasing the inflation rate? What will higher rate increases do if inflation is going down? Slam us into a recession when is isn't needed? Let's see how the data plays out until the next meeting. This all sure seems like gambling!

[fishingrod]

files.stlouisfed.org/files/htdocs/publications/review/2020/05/01/is-the-phillips-curve-still-alive.pdf

Took me a while to find an article that agreed with me. Lol

[mozart522]

I think people (the market) are overreacting at this point. .75%, .50, more, less? We have two CPI reports before the next FED meeting. We have one employment situation report. And bunches or other data before the next meeting.

Almost anything that one does today is just one big fat bet. I'm continuing to buy short T-Bills a little at a time. Not a bet.

[retiredat48]

Aug 5, 2022 16:34:52 GMT fishingrod said:

retiredat48 ,
"I have a side bet fed will NOT go 75 basis points rise in Sept. Takers?"
____________________________________________________________________________________________________________

You will be betting against the market. It is at 72.5% right now predicted chance of .75BPS in Sept.

www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

I am already in for a ice cream cone. And not a cheap one either.

What makes you think they will be slow to raise?

R48 in bold...less than 75 bp is not slow.  It is what they have been telling us...25-50 bp.  Fed's Bullard comes out and talks possibility of 75 bp; but Bullard is the most hawkish of fed-he has one vote.  Other fed personnel are dovish.  In Sept we will have more data...and the election looms; fed does not want to seem to be affecting the mid term election.

I believe the sharp uptick in rates is because of the jobs report. Still raging along.

Jobs report and employment rate, misleading.  Of course we continue to fill the milions of job openings that exist because of covid.  But note the participation rate keeps falling; that is, many (especially stay-at-home moms) have decided not to go back to work.  Lost 2% of workforce...maybe permanently.  Past recessions showed jobs actually INCREASING FOR THE FIRST FEW MONTHS INTO RECESSION. Then layoffs begin in earnest.

[retiredat48]

retiredat48 previously posted,
"I have a side bet fed will NOT go 75 basis points rise in Sept. Takers?"
____________________________________________________________________________________________________________

fishingrod replied: You will be betting against the market. It is at 72.5% right now predicted chance of .75BPS in Sept.

R48: Not many takers on that 75 bp rise bet. However, now we see the odds at less than 50%!!

Guess fishingrod has "gone fishing."

Go VGSH...

R48