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

[mozart522]

@slooow,"Could someone simply explain why buying bonds right now is a decent idea?"

Well bonds have a lot less risk(and usually reward) than stocks. There are bonds and there are bond funds. Laddered ST treasury bonds (say 4 weeks, 8 weeks,12 weeks, 6 months, are a decent idea in this market for risk-averse folks who have a lot of cash. I'm starting to build as I'm hearing this is a long term down turn ending in recession sometime in mid to late 2023. won't make a lot, but won't risk anything much.

"Cash is suffering a permanent loss. Permanent"

I don't see it that way, really. Your portfolio's value is represented in $, and so is my cash. Your portfolio is losing value to inflation at the same rate as mine. This is mitigated by how much your portfolio increases or declines during any period. So if you are up more than inflation YTD in your portfolio, congrats, you are in the minority. But if your portfolio has lost value YTD, then currently, you are the one who is further behind. Now you say you may have greater future potential, but that would depend on when the cash holder decides to invest at lower prices.

[Deleted]

Hi M - thanks - given your outlook I get why you are buying.

Yes - the minute I sell and realize a loss, it's permanent. Stocks represent real assets, so while my dollar value is down, my asset remains. In my view, this is temporary. Same way one views a house.

Holding cash in my view right now is a permanent loss.

[mozart522]

@slooow,
"Holding cash in my view right now is a permanent loss."

Why? Cash is an asset. If I hold it and lose purchasing power to inflation that isn't any different than a paper loss, if I put that cash to work later and make all that loss of purchasing power back and more. No different than you having to make your paper loss whole at some point.

And I'll add, much of the current inflation is not an issue for me. Only food and necessary services really. Fill up once a month.

And my loss is known or at least controllable. The horrible math of paper losses means you could take a very long time to get back to even, let alone a gain. And it would be worse if you needed to spend your distributions but I think you are still working and plowing your dividends back into more shares. That is what I did 20 years ago. Now I don't want big paper losses.

[Deleted]

Mozart - there is a difference as to how inflation affects different asset classes. Better stated than I can:

Inflation and Asset Classes
Inflation has the same effect on liquid assets as any other type of asset, except that liquid assets tend to appreciate in value less over time. This means that, on net, liquid assets are more vulnerable to the negative impact of inflation. In terms of the broader economy, higher rates of inflation tend to cause individuals and businesses to hold fewer liquid assets.

Illiquid assets are also affected by inflation, but they have a natural defense if they appreciate in value or generate interest. One of the chief reasons most workers place money into stocks, bonds, and mutual funds is to keep their savings safe from the effects of inflation. When inflation is high enough, individuals often convert their liquid assets into interest-paying assets, or they spend the liquid assets on consumer goods.

Obviously, cash is a liquid asset. In times of higher inflation, it is usual to hold as little cash as possible since it loses purchasing power. There is no defense. Paper losses - I am down less than 15% on the year. There's not an extra 8% in there for inflation for real assets. That 8% is permanent in the dollar unless there is deflation. It could happen, but very unlikely. I am pretty convinced I will earn the long term real rate of return for the market and have a very good chance of distributions that keep up with inflation.

Inflation is insidious and silent. Your loss of holding cash is not known until after the fact. Who was piping up there would be 8% annual inflation a year ago? I understand your personal situation. As I said, cash can be a very sensible alternative, but recognize the effect from inflation when calculating opportunity costs. I've got a pretty good chunk losing purchasing power myself. I have no doubt, it is indeed losing.

[mozart522]

@slooow,

Sorry but I don't agree. First, you are extrapolating both my cash holding period as well as your bounce back period. You are down 15% + inflation and I'm down only inflation. I may well put my cash to work at much lower prices than when I went to cash and will have recouped that inflation loss in a month. You will need perhaps 18-20% gain from here just to get back to even, and even more to make up for inflation.

Second, of course your portfolio purchasing power is down 15% plus inflation. Purchasing power refers to buying things with CASH. Every day you sit in equities your purchasing power drops the same as mine based on inflation. Your assets are expressed in dollars. You don't take a couple of shares of J&J to the grocery to buy food. The entire value of your portfolio is losing purchasing power every day, just like it did when inflation was 1.2%.

All you are suggesting is that your basket of stocks has a much greater potential to increase in value well above inflation, while cash alone does not. No argument about that. But holding cash in a major downturn gives me the potential to buy at much lower prices than I sold at in January. Today I can buy back my past equity stake at about 18%-20% lower. My potential is only constrained by executing properly. I do not expect to execute perfectly.

As I've said several times, your strategy will work fine, and I gather that you are still investing more money. I am not, and do not intend to have large paper losses in my mid 70's. So I will continue to put cash to work in ST T-bills and wait.

[Deleted]

M - this isn't personal. I don't take it personal. I don't agree with you. Cool. In my opinion real assets are affected very differently by inflation than cash. From what I read on these forums, many think as you do. Sure you have the potential to buy at much lower prices. Your purchasing power will just be less, all else being equal. If you get bargains that make up for that, great. Yes, our timing and goals are different.

As far as me being down 15% plus inflation - I don't understand that reasoning as my portfolio is comprised of real assets. The Value in dollar terms is 15% less today than it was on January 1. Assume my real assets are a house and that the market value is down 15%. Is it really down 15% plus inflation? 100,000 house on 1 Jan. Now 85,000 market value on 17 Jun. I sell it today - I get $85,000 today. How does that include inflation? Now that it is cash - the inflation effects really start. Now if I have 100,000 in cash on Jan 1, I still have 100,000 in cash on 17 Jun. What I can buy is 4% less or so than what I could buy on 1 Jan, assuming 8%+ annual inflation. It's a holding cost. Now, it doesn't affect you personally, that's fine, but most are being affected by it. Now, you might sell my house at the end of the year for $50,000 or $100,000 depending on how well the housing market is doing. Those dollars from Jan 1 are pretty much guaranteed to lose another 4%+ in purchasing power. We can extrapolate that out to years getting to average holding period averages.

Yes, I am suggesting that my basket of stocks, claims on real assets, ,has a much better chance of increasing in value well above the dollar right now. Otherwise, I would of course hold dollars.

Anyways, I am sure your strategy will work fine and is appropriate for your point in life and risk tolerance. All I am saying is we should recognize the cost of holding dollars right now and that inflation affects different assets differently. I am not saying that cash holders won't make it up nor that my strategy is superior.

[mozart522]

@slooow ,

Here is an example from your example. You buy a house in 2020 for 100K. Two years later you sell that house for 100K. No paper loss. Are you suggesting that 100K has the same purchasing power it did in 2020? It doesn't. And are you suggesting that it lost that power the second it went from house equity to cash? Its purchasing power is diminished by inflation. We can't avoid inflation by hiding behind real assets unless the assets appreciate and that gain is still reduced by inflation. In your example, you have both a loss of 15% but also a loss of purchasing power equal to the loss of purchasing power of the original 100K.

Everything is subject to death, taxes, and inflation. If you sold that house for 120K, your purchasing power from your gain would still be less than that 20K would have been in 2020. People often sell houses many years after they buy them and have gains but from a purchasing power standpoint, it is all wiped out by inflation.

This is the source of our difference: "All I am saying is we should recognize the cost of holding dollars right now and that inflation affects different assets differently."  I'm saying inflation affects future purchasing power equally.

[Deleted]

With 8% inflation ( I personally feel it is lot higher in actual), I doubt any investment can beat it.

But I think point of investing is to get inflation adjusted gains. So for any returns we should ideally subtract out inflation to get real gains/loss.

If one leaves money in cash (checking/ Saving account) say at 0-1% return one is always losing purchasing power to inflation (>2-3%) and over time it will compound negatively.

( I wish they teach these things when I was in school/college rather than theory of relativity and quantum physics. Quantum Physics was fun though.)

[Deleted]

Why do I have to sell it for $100K? Yes, you can avoid inflation hiding behind real assets, within reason. Hyper inflation - all bets are off. Whether one will be successful hiding by picking the right assets is a different argument. You will not be successful with dollars. See it as you will, but you are arguing the effects of inflation are the same for real assets - stocks are claims on real assets - as cash. The stock market over the long run outruns inflation. Cash does not. That's proven. I really have nothing more to say about it.

Waffle - we (the financial world) do subtract inflation from gains - regularly - that is why we have nominal and real returns. And if I realize returns, I would convert from nominal to real. Again - over the long run - the stock market outruns inflation which is why there is a positive real return.  I really can't believe we are arguing about the cost of holding cash in inflation. I'm sorry. 

[Deleted]

I think you are both are saying the same thing. I believe Mozart's point is that Inflation should be subtracted equally from all returns even if returns on those assets is 0 (as in cash, leading to real negative returns) or negative (as in loss).

[Deleted]

Fair enough - but then we go back to debates about paper loss being equivalent to real loss. I just can't debate that, so any discussion using that as a premise doesn't make sense to me. Sorry. My only comment really was to recognize holding cash has a permanent cost that should always be considered. I seem to be in a minority on this forum thinking that, along with tax consequences, should factor into investment decisions. If they do, and are discounted, with cash being a better choice. Great. Just recognize it. I very much realize when I sell , I will be looking at real returns. I am very much aware as to whether any distributions are increasing with inflation or not. That's all.

[chang]

Jun 17, 2022 14:58:53 GMT @slooow said:

I seem to be in a minority on this forum thinking that, along with tax consequences, should factor into investment decisions. 

I'm in that minority ... tax consequences can be huge and have an enormous short/long term impact on selling decisions.

[Deleted]

Sara said - "holding cash has a permanent cost that should always be considered" - Yes inflation eats at it like termites.

unless one is earning returns on savings which exceeds inflation, things are going to be really really bad. I wish some one taught such a simple thing to me when I was younger.

( Assuming one has cash for 6 months to 1 year of living first in case markets go down the drain and one loses job.)

[Deleted]

Jun 17, 2022 15:01:03 GMT chang said:

Jun 17, 2022 14:58:53 GMT @slooow said:

I seem to be in a minority on this forum thinking that, along with tax consequences, should factor into investment decisions. 

I'm in that minority ... tax consequences can be huge and have an enormous short/long term impact on selling decisions.

If one has long term gain, are they not capped at 20%? Which is lot less than regular income tax (40%) for many of us.

I have regretted not selling many times because of I did not want to pay tax. I lost lot more than 20%.

May be i should started thinking, for taxable accounts, inflation and tax adjusted returns.

[mozart522]

Jun 17, 2022 14:40:49 GMT @slooow said:

Why do I have to sell it for $100K? Yes, you can avoid inflation hiding behind real assets, within reason. Hyper inflation - all bets are off. Whether one will be successful hiding by picking the right assets is a different argument. You will not be successful with dollars. See it as you will, but you are arguing the effects of inflation are the same for real assets - stocks are claims on real assets - as cash. The stock market over the long run outruns inflation. Cash does not. That's proven. I really have nothing more to say about it.

Waffle - we (the financial world) do subtract inflation from gains - regularly - that is why we have nominal and real returns. And if I realize returns, I would convert from nominal to real. Again - over the long run - the stock market outruns inflation which is why there is a positive real return.  I really can't believe we are arguing about the cost of holding cash in inflation. I'm sorry. 

No, I'm not arguing that.  I'm arguing that inflation affects the dollar value of a static portfolio of assest the same as it does cash in terms of purchaing power at any given point in time.  You seem to be arguing that cash doesn't outrun inflation.  Agree.  But holding cash while waiting for better prices is just an investment bet like holding dividend paying individual stocks is.  I do not plan to hold for long and have put a lot to work in treasuries recently.  Your dividends are being paid in inflation eroded dollars.

[mozart522]

Jun 17, 2022 14:47:34 GMT @waffle said:

I think you are both are saying the same thing. I believe Mozart's point is that Inflation should be subtracted equally from all returns even if returns on those assets is 0 (as in cash, leading to real negative returns) or negative (as in loss).

yes, exactly

[archer]

Real losses vs paper losses apply to both cash and stocks/bonds.

Over the past yr, real loss for cash (real meaning when it is time to spend) is ~8.5%
$100 is still $100 but only buys about 92% of what it did 12 months ago.

Over the past year $100 in SPY is now worth about $87 and buys about 92% of what it did 12 mo. ago.

The above are real losses. As for paper losses. Cash hasn't lost any, and SPY lost ~12%.

Further, if you have taken distributions, Spy will be less than $87, but benefited from less compounded loss from market decline.

The paper loss of cash due to inflation is only relevant to items that have inflated at the time of spending it, at which time it becomes a real loss. However, now I can spend the $100 in cash on $100 of SPY at a better deal than a year ago.

I think the point Sara is making is that 10 yrs from now $100 in cash will buy much less than it did today, whereas most anyone would bet that $100 that SPY will buy much more. But, holding cash for 10 yrs when the market has recovered points to another problem, like those that never reentered after '08.

Because of this, my approach to income investing is to avoid ones with eroding price relative to stocks, especially ones with eroding NAV. A fund like SCHD provides nice distributions, and also growth. Why not go for the best of both worlds?

[Deleted]

But to Mozart's point, investors like Buffett hold cash for long time waiting for the right opportunity. I do not know if that is called market timing or not. And that is what it seems Mozart is doing, holding cash, but likely for shorter duration than Buffet. And he understands the carrying cost which he is willing to pay.

there are folks like me who stayed in cash because of ignorance or fear. And that is foolishness which Sara correctly pointed out. for people like me just investing in Vangard Wellington or sp500  and forgetting it would have been better. Ie time in market rather than waiting for right opportunity (timing?).

[Deleted]

Archer - Again I disagree - the price assigned to SPY has decreased. If you sell - then you have a real loss. Debatable if the intrinsic value of the assets it represents has. Money is the means of exchange. There is no intrinsic value to cash. Again - all I am saying is that holding dollars in inflationary times has a known definable cost.

I don't think we are going to come to a meeting of the minds here. This is a very difficult time for investing and I don't want to aggravate.

[Deleted]

I read some where that valuation ( intrinsic value) depends on interest rate based on future cashflow or DCF or something like that. So intrinsic value can change based on interest rate? or am I mixing two different things?

[Deleted]

The interest rate is a huge part of intrinsic valuation. It is why we are seeing the massive revaluation of assets and will continue to. We don't know where it will settle. But the higher the discount rate goes, the less future cash flows are worth.

Yes - I am well aware of M's strategy and have no doubt he will be successful.  For me - right now - a 15% drop - isn't worth going to cash and then trying to rebuild. Never mind the tax consequences for me. 

[mozart522]

Jun 17, 2022 15:47:27 GMT @slooow said:

Archer - Again I disagree - the price assigned to SPY has decreased. If you sell - then you have a real loss. Debatable if the intrinsic value of the assets it represents has. Money is the means of exchange. There is no intrinsic value to cash. Again - all I am saying is that holding dollars in inflationary times has a known definable cost.

I don't think we are going to come to a meeting of the minds here. This is a very difficult time for investing and I don't want to aggravate.

Sara:  Your dividends are being paid in inflation eroded dollars.  Every dollar of earnings on your stocks is eroded by inflation.  This is happening whether you have a paper loss or not.

[Deleted]

M - yes - and that is why I try my darnedest to select companies with solid dividend growth to protect as much as I can from that erosion. I also re-invest. I was schooled on the dangers of inflation, so might go overboard more than some.

[mozart522]

Jun 17, 2022 15:36:59 GMT archer said:

Real losses vs paper losses apply to both cash and stocks/bonds.

Over the past yr, real loss for cash (real meaning when it is time to spend) is ~8.5%
$100 is still $100 but only buys about 92% of what it did 12 months ago.

Over the past year $100 in SPY is now worth about $87 and buys about 92% of what it did 12 mo. ago.

The above are real losses. As for paper losses. Cash hasn't lost any, and SPY lost ~12%.

Further, if you have taken distributions, Spy will be less than $87, but benefited from less compounded loss from market decline.

The paper loss of cash due to inflation is only relevant to items that have inflated at the time of spending it, at which time it becomes a real loss. However, now I can spend the $100 in cash on $100 of SPY at a better deal than a year ago.

I think the point Sara is making is that 10 yrs from now $100 in cash will buy much less than it did today, whereas most anyone would bet that $100 that SPY will buy much more. But, holding cash for 10 yrs when the market has recovered points to another problem, like those that never reentered after '08.

Because of this, my approach to income investing is to avoid ones with eroding price relative to stocks, especially ones with eroding NAV. A fund like SCHD provides nice distributions, and also growth. Why not go for the best of both worlds?

Before I went to cash, I had a large part of my equity sleeve in SCHD.  It has dropped about 11% since then, and further down today so far.  One day I'll be back in.  I don't take dividends but reinvest them and believe the strength of this fund is the screens and constraints it uses.

[retiredat48]

So, I did some homework regarding low distribution yield versus SEC yield, as I experienced this low yield in first monthly distribution.

I contacted Vanguard, and was not fully satisfied as my Flagship rep said the income specialists were not taking calls.  I will pursue this later, trying to talk to VGsH fund specialists.  The rep was modestly knowledgeable.

The SEC yield is 2.67%; the distribution yield is 0.57%.  They gave the cookbook,but correct guidance I suspect, that the sec yield reflects the cap gains built into the mark to market bond prices.  As bonds are sold or mature they will have a gain, to get to the sec yield.

vGSH duration is 1.9 yrs…43% of holdings are 2-3 yrs and 57% are 1-2 yrs.  So one has to wait to get the yield…but fund price should reflect the cap gain continuing buildup.  I noticed the fund also pays a cap gain disty in December.

Partly this wide divergence between sec yield and disty yield comes from the fact we just had the FASTEST rise in 2yr bond yields, in history (as reported).  

I could not get the “average weighted price” in the fund’s literature or rep.

Thus, a consideration has to be given whether or not to just do Treasury direct bond purchases, getting the yield immediately, with nav price float…or go with VGsH.  

A cursory review shows I am in a net small gain in my recent VGsH buys.  I could sell and go treas direct.

Your thoughts or comments…

R48

[FD1000]

Jun 17, 2022 20:34:40 GMT retiredat48 said:

So, I did some homework regarding low distribution yield versus SEC yield, as I experienced this low yield in first monthly distribution.

I contacted Vanguard, and was not fully satisfied as my Flagship rep said the income specialists were not taking calls.  I will pursue this later, trying to talk to VGsH fund specialists.  The rep was modestly knowledgeable.

The SEC yield is 2.67%; the distribution yield is 0.57%.  They gave the cookbook,but correct guidance I suspect, that the sec yield reflects the cap gains built into the mark to market bond prices.  As bonds are sold or mature they will have a gain, to get to the sec yield.

vGSH duration is 1.9 yrs…43% of holdings are 2-3 yrs and 57% are 1-2 yrs.  So one has to wait to get the yield…but fund price should reflect the cap gain continuing buildup.  I noticed the fund also pays a cap gain disty in December.

Partly this wide divergence between sec yield and disty yield comes from the fact we just had the FASTEST rise in 2yr bond yields, in history (as reported).  

I could not get the “average weighted price” in the fund’s literature or rep.

Thus, a consideration has to be given whether or not to just do Treasury direct bond purchases, getting the yield immediately, with nav price float…or go with VGsH.  

A cursory review shows I am in a net small gain in my recent VGsH buys.  I could sell and go treas direct.

Your thoughts or comments…

R48

Good post, I already said it several times.
1) Current monthly yield on VGSH is low and what matters. I don't need to call anyone.
2) You can get 2 year rate over 3% NOW and it's a guarantee. 
See below from Fidelity.  CD pays a bit higher now. In taxable accounts, you don't pay state tax on treasuries.

Attachments:

[Deleted]

retiredat48,

Treasury Direct has some limitations (e.g., no IRA accounts, must transfer to bank or brokerage to sell). 


www.investopedia.com/articles/bonds/08/treasuries-fed.asp

In article Fidelity is rated #1

[mozart522]

Jun 17, 2022 20:34:40 GMT retiredat48 said:

So, I did some homework regarding low distribution yield versus SEC yield, as I experienced this low yield in first monthly distribution.

I contacted Vanguard, and was not fully satisfied as my Flagship rep said the income specialists were not taking calls.  I will pursue this later, trying to talk to VGsH fund specialists.  The rep was modestly knowledgeable.

The SEC yield is 2.67%; the distribution yield is 0.57%.  They gave the cookbook,but correct guidance I suspect, that the sec yield reflects the cap gains built into the mark to market bond prices.  As bonds are sold or mature they will have a gain, to get to the sec yield.

vGSH duration is 1.9 yrs…43% of holdings are 2-3 yrs and 57% are 1-2 yrs.  So one has to wait to get the yield…but fund price should reflect the cap gain continuing buildup.  I noticed the fund also pays a cap gain disty in December.

Partly this wide divergence between sec yield and disty yield comes from the fact we just had the FASTEST rise in 2yr bond yields, in history (as reported).  

I could not get the “average weighted price” in the fund’s literature or rep.

Thus, a consideration has to be given whether or not to just do Treasury direct bond purchases, getting the yield immediately, with nav price float…or go with VGsH.  

A cursory review shows I am in a net small gain in my recent VGsH buys.  I could sell and go treas direct.

Your thoughts or comments…

R48

The average weighted price is 97.75 which is above the average for the cat., 96.66 according to M*  What would you buy at TD that you can't buy through Vanguard?  I just bought 3 month and 1 month T-bills at auction through them, no fees.  TD is complicated and I believe you need to buy through a bank.  I could be wrong about that.  Buying though VG in my IRA was very easy.


thefinancebuff.com/treasury-bills-cd-money-market.html

[mozart522]

and this: personal.vanguard.com/us/content/Funds/FixIncTreasuriesContent.jsp

[fishingrod]

I will note that one year ago the SEC yield on VGSH was .10 %

The SEC yield today the highest in a year is 2.64%

personal.vanguard.com/us/funds/tools/pricehistorysearch?radio=1&results=get&FundType=VanguardFunds&FundIntExt=INT&FundId=1942&Sc=1&fundName=1942&fundValue=1942&radiobutton2=1&beginDate=6%2F17%2F2021&endDate=6%2F17%2F2022&year=#res

www.thebalance.com/distribution-yield-vs-sec-yield-which-should-you-use-416978