Decision between Total Bond or Intermediate Treasury

[Ice-9]

Hello Bogleheads,

For many years I used Total Bond Index for my nominal bond allocation, mostly because it was the only bond index fund available in my workplace plan.

A couple of years ago, the self-directed brokerage window "BrokerageLink" became available in my plan, allowing me access to a large assortment of funds. At that time, I switched my nominal bond allocation to Intermediate Treasury Index. My reasoning was that, although Total Bond Index was satisfactory, Intermediate Treasury Index was a better diversifier of equities with a somewhat comparable duration and average maturity.

I'm wondering if the very low interest rates today affect the risk/reward enough to reconsider that decision?

FUAMX Fidelity® Intermediate Treasury Bond Index Fund
30-Day Yield 0.42%
Weighted Avg Maturity 7.00 Years
Duration 6.58 Years

FXNAX Fidelity® U.S. Bond Index Fund
30-Day Yield 1.19%
Weighted Avg Maturity 7.80 Years
Duration 5.72 Years

So, the total bond fund now has a shorter duration and higher yield. Of course, the slightly increased risks of the addition of corporate bonds and mortgage backed bonds (that can be refinanced when rates drop) continue to make it a slightly less preferable diversifier than the Treasury fund. But that's a big difference in yield. Curious if other Bogleheads have thoughts on this.

[Munir]

Very good question. Do you happen to also have some performance numbers comparing the two funds- knowing that the past does not predict the future?

[Valuethinker]

Hello Bogleheads,

For many years I used Total Bond Index for my nominal bond allocation, mostly because it was the only bond index fund available in my workplace plan.

A couple of years ago, the self-directed brokerage window "BrokerageLink" became available in my plan, allowing me access to a large assortment of funds. At that time, I switched my nominal bond allocation to Intermediate Treasury Index. My reasoning was that, although Total Bond Index was satisfactory, Intermediate Treasury Index was a better diversifier of equities with a somewhat comparable duration and average maturity.

I'm wondering if the very low interest rates today affect the risk/reward enough to reconsider that decision?

FUAMX Fidelity® Intermediate Treasury Bond Index Fund
30-Day Yield 0.42%
Weighted Avg Maturity 7.00 Years
Duration 6.58 Years

FXNAX Fidelity® U.S. Bond Index Fund
30-Day Yield 1.19%
Weighted Avg Maturity 7.80 Years
Duration 5.72 Years

So, the total bond fund now has a shorter duration and higher yield. Of course, the slightly increased risks of the addition of corporate bonds and mortgage backed bonds (that can be refinanced when rates drop) continue to make it a slightly less preferable diversifier than the Treasury fund. But that's a big difference in yield. Curious if other Bogleheads have thoughts on this.

Because of precisely what you describe (mortgage backed securities) the US bond index fund will extend in duration if interest rates rise (technically: negative convexity, the second derivative of price wrt yield).

In actual practice the latter fund will be more volatile, but probably have a very similar return to the former fund. Corporate bonds take on a bit of equity risk, which cuts your overall portfolio diversification.

Shrug. It probably makes very little difference in the end. Whichever fund has the lower Expense Ratio, though? That probably is a good guide to which is the better buy.

[ruralavalon]

Hello Bogleheads,

For many years I used Total Bond Index for my nominal bond allocation, mostly because it was the only bond index fund available in my workplace plan.

A couple of years ago, the self-directed brokerage window "BrokerageLink" became available in my plan, allowing me access to a large assortment of funds. At that time, I switched my nominal bond allocation to Intermediate Treasury Index. My reasoning was that, although Total Bond Index was satisfactory, Intermediate Treasury Index was a better diversifier of equities with a somewhat comparable duration and average maturity.

I'm wondering if the very low interest rates today affect the risk/reward enough to reconsider that decision?

FUAMX Fidelity® Intermediate Treasury Bond Index Fund
30-Day Yield 0.42%
Weighted Avg Maturity 7.00 Years
Duration 6.58 Years

FXNAX Fidelity® U.S. Bond Index Fund
30-Day Yield 1.19%
Weighted Avg Maturity 7.80 Years
Duration 5.72 Years

So, the total bond fund now has a shorter duration and higher yield. Of course, the slightly increased risks of the addition of corporate bonds and mortgage backed bonds (that can be refinanced when rates drop) continue to make it a slightly less preferable diversifier than the Treasury fund. But that's a big difference in yield. Curious if other Bogleheads have thoughts on this.

The two funds have almost identical expense ratios (0.025% for U.S. Bond vs. 0.30% for Intermediate-term Treasury), Fidelity® Intermediate Treasury Bond Index Fund (FUMAX) should have a lower correlation to the stock market and so provide better diversification. Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio".

Both are very good funds. I use Vanguard Intermediate-Term Bond Index Fund (VBILX) which is 50% government bonds, 50% corporate bonds, with no Mortgage Backed Securities (MBS).

[Broken Man 1999]

We hold bonds for safety, not for yield.

Our portfolio's equity holdings are rising (by design) as we age, so, given that, I prefer the bonds/bond funds that affords me the best outcome should I have to lean heavily on them for living expenses during a longer period of time when equities are in a funk. Those are Short-term and Intermediate-term Treasury Index mutual funds and ETFs for us.

Others here would recommend TIPs as well. We don't hold any tips, but we do have I-bonds, about 14.4% of our bond holdings (I haven't updated the value in 5 or 6 months).

I look at total return, and I am very willing to sell bond fund shares if I should be removing $$$ from the bond side of our AA. The fact that our treasury holdings have capital gains is all the better.

I think (perhaps in error) that some have a reluctance, or fear to sell bond fund shares, especially when in the past they have been able to just use the yield income for their expenses. Kinda like the way some don't like to sell their equity fund holdings when dividends don't cover their expenses. Some feel they are eating their "seed-corn", so to speak.

OP, you have to answer the simple question: Why do you hold bonds?

Broken Man 1999

[willthrill81]

Basically, the only difference is that TBM includes some exposure to corporate bonds, which themselves behave as a mixture of mostly Treasuries and a little stocks (i.e. about 20/80). This means that TBM is expected to be both more volatile than ITT, which we have definitely seen this year, and to have a higher long-term return.

[anon_investor]

Basically, the only difference is that TBM includes some exposure to corporate bonds, which themselves behave as a mixture of mostly Treasuries and a little stocks (i.e. about 20/80). This means that TBM is expected to be both more volatile than ITT, which we have definitely seen this year, and to have a higher long-term return.

TBM also has US government mortgaged backed securities, which act differently than treasuries to interest rate changes.

[KlangFool]

OP,


I have both. They are for two separate reasons:


A) Total Bond Market Index -> This is for my normal 3-funds portfolio.


B) Intermediate-Term Treasury -> This is for my mini-Larry "Barbell" portfolio.


10% of my portfolio is in the SCV and 10% in the Intermediate-Term Treasury.

https://www.bogleheads.org/wiki/Barbell_strategy


The basic idea is to pair the very risky (SCV) with the very safe (Treasury) investment together and rebalance between them. It works very well. They tend to oscillate opposite to each other.


KlangFool

[willthrill81]

Basically, the only difference is that TBM includes some exposure to corporate bonds, which themselves behave as a mixture of mostly Treasuries and a little stocks (i.e. about 20/80). This means that TBM is expected to be both more volatile than ITT, which we have definitely seen this year, and to have a higher long-term return.

TBM also has US government mortgaged backed securities, which act differently than treasuries to interest rate changes.

True, but I don't know that there's enough exposure to MBS in TBM to really move the needle much.

[anon_investor]

Basically, the only difference is that TBM includes some exposure to corporate bonds, which themselves behave as a mixture of mostly Treasuries and a little stocks (i.e. about 20/80). This means that TBM is expected to be both more volatile than ITT, which we have definitely seen this year, and to have a higher long-term return.

TBM also has US government mortgaged backed securities, which act differently than treasuries to interest rate changes.

True, but I don't know that there's enough exposure to MBS in TBM to really move the needle much.

20.6% as of 8/31/2020. Seems like a lot of exposure to me...
https://investor.vanguard.com/mutual-fu ... olio/vbtlx

Just to clarify, I am not saying this is good or bad, only that it might have an impact on Total Bond Market Index funds as to how they react to interest rates compared to an Intermediate Treasury fund, so something to consider.

[dcabler]

I do both, but not because I want to. Nothing inherently wrong with either choice as it comes down to personal preference and philosophy. Add a dose of recency bias and I prefer intermediate treasuries which, since about the Volker era, seem to do a bit better during downturns than total bond.

In the primary portion of my portfolio, which holds about 85% of my total investments, I use intermediate Treasuries via FUAMX and it's held in my rollover IRA at Fidelity. I first bought FIBAX which Fidelity consolidated, along with other classes of the same fund, into FUAMX a few years ago.

In other accounts I hold, like my HSA, a deferred compensation account, and my current company's 401K, I hold a Total Bond fund because that's all that's available.

Yeah, "it's all one portfolio" but I prefer to mirror my holdings across the accounts as it make rebalancing a bit easier. Eventually the HSA will be moved to Fidelity, the deferred comp account will complete paying out in about 2 years, and the 401K will be rolled over and I'll only have FUAMX as my nominal bond holding. Although I've been pondering increasing the duration of my nominal bonds and may do that in a few years by adding some FNBGX.

I also hold a TIPs ladder +Ibonds that I'll tap at age 70 when I also start SS.

Cheers.

[willthrill81]

Basically, the only difference is that TBM includes some exposure to corporate bonds, which themselves behave as a mixture of mostly Treasuries and a little stocks (i.e. about 20/80). This means that TBM is expected to be both more volatile than ITT, which we have definitely seen this year, and to have a higher long-term return.

TBM also has US government mortgaged backed securities, which act differently than treasuries to interest rate changes.

True, but I don't know that there's enough exposure to MBS in TBM to really move the needle much.

20.6% as of 8/31/2020. Seems like a lot of exposure to me...
https://investor.vanguard.com/mutual-fu ... olio/vbtlx

Just to clarify, I am not saying this is good or bad, only that it might have an impact on Total Bond Market Index funds as to how they react to interest rates compared to an Intermediate Treasury fund, so something to consider.

I didn't recall it being that high. Thanks.

[1210sda]

The two funds have almost identical expense ratios (0.025% for U.S. Bond vs. 0.30% for Intermediate-term Treasury), orate bonds, with no Mortgage Backed Securities (MBS).

Is this a recent change? I thought total bond market admiral (VBTLX) was at 0.05%?

[ruralavalon]

The two funds have almost identical expense ratios (0.025% for U.S. Bond vs. 0.30% for Intermediate-term Treasury), orate bonds, with no Mortgage Backed Securities (MBS).

Is this a recent change? I thought total bond market admiral (VBTLX) was at 0.05%?

Fidelity® U.S. Bond Index Fund (FXNAX), which is one of the funds referred to in the original post, has an expense ratio of 0.025%.

[Mike Scott]

It took a while for me to get there, but I finally settled on intermediate treasuries for "safe" money with a smidge higher allowance for total stock market. It may not matter much long term which is part of why it is such a difficult decision.

[peppers]

fwiw

We are retired and in spending down mode.
Our portfolio:

VFIUX Vanguard Intermediate Term Treasury
VBTLX Vanguard Total Bond Market
FXNAX Fidelity US Bond Index

No complaints

[anon_investor]

fwiw

We are retired and in spending down mode.
Our portfolio:

VFIUX Vanguard Intermediate Term Treasury
VBTLX Vanguard Total Bond Market
FXNAX Fidelity US Bond Index

No complaints

Curious whether any of those funds are sitting in a taxable account.

[peppers]

fwiw

We are retired and in spending down mode.
Our portfolio:

VFIUX Vanguard Intermediate Term Treasury
VBTLX Vanguard Total Bond Market
FXNAX Fidelity US Bond Index

No complaints

Curious whether any of those funds are sitting in a taxable account.

VFIUX is in taxable. It was received as an inheritance.

[anon_investor]

fwiw

We are retired and in spending down mode.
Our portfolio:

VFIUX Vanguard Intermediate Term Treasury
VBTLX Vanguard Total Bond Market
FXNAX Fidelity US Bond Index

No complaints

Curious whether any of those funds are sitting in a taxable account.

VFIUX is in taxable. It was received as an inheritance.

Ah, VFIUX is actually not bad in taxable at current interest rates. The meager monthly payments are exempt from state income tax.

Would you have used a different fund if not for receiving it as an inheritance?

[peppers]

fwiw

We are retired and in spending down mode.
Our portfolio:

VFIUX Vanguard Intermediate Term Treasury
VBTLX Vanguard Total Bond Market
FXNAX Fidelity US Bond Index

No complaints

Curious whether any of those funds are sitting in a taxable account.

VFIUX is in taxable. It was received as an inheritance.

Ah, VFIUX is actually not bad in taxable at current interest rates. The meager monthly payments are exempt from state income tax.

Would you have used a different fund if not for receiving it as an inheritance?

No. Our original plan was to use a modest pension and withdraw from our tax advantaged accounts; but life happens. Social Security will start for one of us next year. We did some Roth conversions this year and will run the numbers and see if we can "squeeze in" some more Roth dollars in 2021.

[1789]

Good question. Intermediate treasury is a better ballast for stock market volatility. Total bonds (on paper) supposed to yield better in good market conditions as it has some corporate bonds.

[Ice-9]

Thank you everyone. I realized this is a decision with probably little impact in the long run.

When I switched from Total Bond to Intermediate Treasury a couple of years ago, I remember thinking, "The decrease in SEC Yield is not that great, so I don't feel like I'm 'paying' much for a better diversifier of equities." But recently seeing the yield of Total Bond at nearly 3X the yield, and the duration almost a year shorter, I started to question that.

I *think* I'm staying put for now in Intermediate Treasury Index. I may try to think up a potential target spread between the two funds in either yield or duration or both at which point I would switch back to Total Bond, only because sometimes I like to make the simple things feel complicated.

Thank you all again.