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Post by Chahta on Jun 1, 2021 20:55:24 GMT
Terminology get mixed up alot.
Ultra short term = 90 days or less = very low interest rate risk, mostly low credit risk
Short duration = 6-12 months = low interest rate risk, mostly low credit risk?
Low duration = 1-1 1/2 years = moderate interest rate risk, can have low to higher credit risk
Short term = 1-5 years = low to moderate interest rate risk, can have low to higher credit risk
Is this correct?
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Post by yogibearbull on Jun 1, 2021 22:32:59 GMT
If use M* classification,
"Ultrashort Bond
Ultrashort-bond portfolios invest primarily in investment-grade U.S. fixed-income issues and have durations typically of less than one year. This category can include corporate or government ultrashort bond portfolios, but it excludes international, convertible, multisector, and high-yield bond portfolios. Because of their focus on bonds with very short durations, these portfolios offer minimal interest-rate sensitivity and therefore low risk and total return potential. Morningstar calculates monthly breakpoints using the effective duration of the Morningstar Core Bond Index in determining duration assignment. Ultrashort is defined as 25% of the three-year average effective duration of the MCBI."
"Short-Term Bond
Short-term bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income issues and typically have durations of 1.0 to 3.5 years. These portfolios are attractive to fairly conservative investors, because they are less sensitive to interest rates than portfolios with longer durations. Morningstar calculates monthly breakpoints using the effective duration of the Morningstar Core Bond Index in determining duration assignment. Short-term is defined as 25% to 75% of the three-year average effective duration of the MCBI."
On the other hand, duration is a property of the bond portfolio. As such, it has no implications on credit quality. So, unconstrained and ST-HY funds can have low durations and low credit quality.
But there are some conventions. The current ultra-ST is only investment-grade. This wasn't historically so - pre 2008, many had low quality and crashed and burned. The category was so BAD in 2008 that it went away for a few years and then a new ultra ST emerged with only investment-grade.
ST is a very wide category and may include all sorts of credit quality. Some may also use securitized/manufactured credits that don't behave as expected when going gets tough and that poses additional risks.
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Post by FD1000 on Jun 23, 2021 3:28:47 GMT
Terminology get mixed up alot. Ultra short term = 90 days or less = very low interest rate risk, mostly low credit risk Short duration = 6-12 months = low interest rate risk, mostly low credit risk? Low duration = 1-1 1/2 years = moderate interest rate risk, can have low to higher credit risk Short term = 1-5 years = low to moderate interest rate risk, can have low to higher credit risk Is this correct?In the real world, there are variation and why I don't invest based on definitions. Are 2 funds similar if both have short duration? Nope, they can be a mile a part. Know what you own has been the only way. If you don't, stay with simple Vanguard index funds. |
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Post by chang on Jun 23, 2021 3:51:44 GMT
Terminology get mixed up alot. Ultra short term = 90 days or less = very low interest rate risk, mostly low credit risk Short duration = 6-12 months = low interest rate risk, mostly low credit risk? Low duration = 1-1 1/2 years = moderate interest rate risk, can have low to higher credit risk Short term = 1-5 years = low to moderate interest rate risk, can have low to higher credit risk Is this correct?Hey Commodore, I think avg duration and avg credit quality are completely independent. Think of these as two axes, creating a box. You can find funds/bonds in all four corners of the box. However, many UST funds do tend to be very short duration, but quasi-low credit quality (between IG and junk)*. I find this a compelling cash parking lot. Me, I own VUSFX and RPHIX. (I guess a high-quality UST fund would essentially be a MM fund, which as we know doesn't yield beans.) I think JPST and GSY are similar, but don't quote me. (I would prefer VUSB over those anyway, because of its ER advantage.) I'm confused by your use of both "duration" and "term". I believe both refer to average duration. Suggest you pick one... I've also noticed that terms like "short duration" or "medium duration" seem to have different meanings (values) when applied to municipal bonds, IG bonds and HY bonds. I don't think there's any reason for this, except perhaps that "short - medium - long" might just be used to divide the bond universe into thirds, in which case the values would naturally be longer for muni funds simply because there are more long-duration muni funds in the muni universe. (Muniverse?) * See for example VUSFX vs. VBIRX. VUSFX is 46% BBB and below, while VBIRX is 13% BBB and below. |
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Post by yogibearbull on Jun 23, 2021 11:45:59 GMT
That is correct. M* defines ST/IT/LT durations for corporates and munis differently.
Credit quality also has different meanings. At any credit rating level, corporates have much higher defaults than munis. Also, BBB for munis is really considered trashy/junky. That is why "BBB & Below + NR" is used for munis (but not for corporates).
High %NR may be OK as many small issues may be unrated, but big funds have in-house rating departments that don't rely on external ratings. Some ultra-ST may have CDs that don't have a regular classification.
This is not unlike trades or professions where apparently similar but different terminologies evolve and one just has be aware of differences.
These details don't matter if one doesn't want to look under the hood.
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Post by Chahta on Jun 23, 2021 18:20:51 GMT
admin: "I'm confused by your use of both "duration" and "term". I believe both refer to average duration. Suggest you pick one...."
That is my question. I am not using those terms; the funds do. SWSBX is Schwab Short Term bond fund. DBLSX is DoubleLine Low Duration bond fund. Yes they hold different things but what does it really mean?
I suppose short term is clear by length of the bond term. Low duration is something that can be created by derivatives and short term, now that I think about it.
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Post by yogibearbull on Jun 23, 2021 18:27:47 GMT
Only for zero-coupon bonds, duration = maturity (or term).
For bonds with coupons, duration < maturity.
Short-term bond fund is a bit more vague than short-duration bond fund.
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Post by FD1000 on Jun 23, 2021 20:55:20 GMT
admin: "I'm confused by your use of both "duration" and "term". I believe both refer to average duration. Suggest you pick one...." That is my question. I am not using those terms; the funds do. SWSBX is Schwab Short Term bond fund. DBLSX is DoubleLine Low Duration bond fund. Yes they hold different things but what does it really mean?
I suppose short term is clear by length of the bond term. Low duration is something that can be created by derivatives and short term, now that I think about it.Duration is a confusing term. When you deal with simple index + vanilla funds from Vanguard, it's easier to understand. When you look at funds with 2+ categories and especially flexible bond funds, it gets tricky. You can't even compare Munis, Treasuries and MBS with the same duration and expect them to be similar. So, the concept of duration + rate change = a certain price change works best with treasuries but less with others. Then, you have funds that change the mix/categories and play with duration and it goes out the door. To make it simple, even the "stupid" US total bonds index (BND) does not work for...duration + rate change = a certain price change...because this fund has 3 main categories. And why I already said... "Know what you own has been the only way. If you don't, stay with simple Vanguard index funds" |
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Post by chang on Jun 23, 2021 21:34:40 GMT
admin: "I'm confused by your use of both "duration" and "term". I believe both refer to average duration. Suggest you pick one...." That is my question. I am not using those terms; the funds do. SWSBX is Schwab Short Term bond fund. DBLSX is DoubleLine Low Duration bond fund. Yes they hold different things but what does it really mean?
I suppose short term is clear by length of the bond term. Low duration is something that can be created by derivatives and short term, now that I think about it.If you're looking at names I think it's just a matter of to-may-to and to-mah-to. Duration and maturity have specific meanings; as far as I know "term" doesn't (except maybe where M* uses it, as yogi pointed out). As you yourself pointed out, some NT funds can use derivatives to shorten duration (or even go negative) for a portfolio with a given average maturity. I would just look at the metrics if you are so inclined, and not worry about the nomenclature. |
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Post by Capital on Jun 26, 2021 0:18:42 GMT
Maturity refers to the date of the last payment. Duration looks at the bond as a set of maturities with each separate principal and interest payment being a separate maturity. The weighted average of all these separate maturities is the duration of the bond. Duration is a better measure of interest rate risk than maturity.
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