Deciphering ST Bond Index Fund (VBIRX) Yield

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LMK5
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Deciphering ST Bond Index Fund (VBIRX) Yield

Post by LMK5 »

Hoping to get some input from the fixed income gurus here. I own VBIRX and I'm trying to figure out why the distribution yield (2.24%) is so much lower than the YTM and the SEC yield. In short, since the NAV of the fund has gone down so much, why wouldn't the distribution yield be closer to market rates of similar individual bonds of 1-5 year maturities?

Below is the data on the fund. I'm hoping someone can explain why the disparity exists, and also if the distribution yield would eventually increase to current market rates (or the SEC yield) for like bonds if interest rates remained level:

1) Distribution yield: 2.24%
2) SEC yield: 4.48%
3) YTM: 4.3%
4) Average coupon: 2.4%
5) Average effective maturity: 2.8%
6) Average duration: 2.7 yrs.
alex_686
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by alex_686 »

Distribution yield is a backwards looking number based on tax reporting.

Yield to maturity ignores the effect of the call option on bonds.

SEC is forward looking economic returns. Note, note taxable- there are differences.
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LMK5
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by LMK5 »

alex_686 wrote: Sat Jun 10, 2023 12:09 pm Distribution yield is a backwards looking number based on tax reporting.

Yield to maturity ignores the effect of the call option on bonds.

SEC is forward looking economic returns. Note, note taxable- there are differences.
Thanks Alex. But why would the distribution yield--which is the actual dividend/NAV cash flow--differ from current rates? I could see the distribution yield being lower than current rates if the NAV had remained flat, but why would the distribution yield be so close to the average coupon if the NAV has gone down?
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by alex_686 »

LMK5 wrote: Sat Jun 10, 2023 12:14 pm
alex_686 wrote: Sat Jun 10, 2023 12:09 pm Distribution yield is a backwards looking number based on tax reporting.

Yield to maturity ignores the effect of the call option on bonds.

SEC is forward looking economic returns. Note, note taxable- there are differences.
Thanks Alex. But why would the distribution yield--which is the actual dividend/NAV cash flow--differ from current rates? I could see the distribution yield being lower than current rates if the NAV had remained flat, but why would the distribution yield be so close to the average coupon if the NAV has gone down?
I am not going to directly answer your question.

First, I really don’t feel like pulling the last couple of quarterly statements and pulling apart where the performance is coming from, and what is driving a wedge between taxable and economic returns. It is my day off. If you want to do so, more power to you. Come back with any questions and I will be happy to answer. This used to be my day job so I have a excellent handle on the details.

Second, why would you want to know this information? I personally consider the distribution numbers next to worthless. Yeah, it has some value for estimating quarterly tax payments, but even here it is pretty thin gruel.

My first guess is that older lower coupon bonds are rolling off being replaced with higher coupon bonds. The raising interest rates would affect coupon but not the principal value much for short term bonds.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by suemarkp »

Look at the Average Coupon in your numbers -- 2.4%. This is close to the current distribution yield of 2.24. Factor in the ER and you are closer.

The average duration of these bonds is 2.7 years. That is the average, so there are bonds older than that. Those older bonds are going to have low coupon rates (even the average ones are low by current rates). As those mature, they will get replaced by new ones at today's yield rates.

I chose this fund myself 3 years ago when money market rates were so bad. I have been somewhat disappointed, but I don't know where else I could have gone at the time except perhaps ultrashort, but its numbers didn't look all that good at the time. Money Markets are much better now, but you never know when rates will drop and the MM fund rates drop quickly. VBIRX will be much better when that happens and have more inertia since it will have 3 years worth of bonds to replace.

Currently, I'm keeping the stock and VBIRX dividends in the settlement fund and not increasing VBIRX yet. Maybe when VBIRX SEC yield is above the settlement fund for a month or two I will buy more VBIRX.
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Hacksawdave
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by Hacksawdave »

Distribution statistics are current and backward looking while SEC is forward looking. It depends on what we are trying to solve. If one looks at January of 2021 the fund’s SEC yield was 0.29% while the distribution of $ 0.013314 per share was at 1.45%. If the goal is to understand what the fund is paying per share now, then distribution statistics work. If the goal is what this fund MIGHT pay in the future, then SEC yield is helpful.
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by grabiner »

LMK5 wrote: Sat Jun 10, 2023 12:14 pm Thanks Alex. But why would the distribution yield--which is the actual dividend/NAV cash flow--differ from current rates? I could see the distribution yield being lower than current rates if the NAV had remained flat, but why would the distribution yield be so close to the average coupon if the NAV has gone down?
Consider a bond with a par value of $1000 which pays a $15 coupon every six months. At par, this bond has a 3% distribution yield, 3% coupon, and 3% SEC yield.

Now, suppose that the bond price drops to $900. The coupon is still 3%. The distribution yield is 3.33%, since that is the ratio of $30 to the new price of $900. The yield to maturity (which is used in calculating SEC yield) is much higher than 3.33%, because the $900 will earn $30 every year but will also increase to $1000 at maturity.

If you buy this bond, or buy a fund which holds this bond, you will only get the $30 payments in cash, but you will also get the benefit of the price increase from $900 to $1000, so your total return will be the yield to maturity.
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LMK5
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by LMK5 »

grabiner wrote: Sun Jun 11, 2023 8:46 pm
LMK5 wrote: Sat Jun 10, 2023 12:14 pm Thanks Alex. But why would the distribution yield--which is the actual dividend/NAV cash flow--differ from current rates? I could see the distribution yield being lower than current rates if the NAV had remained flat, but why would the distribution yield be so close to the average coupon if the NAV has gone down?
Consider a bond with a par value of $1000 which pays a $15 coupon every six months. At par, this bond has a 3% distribution yield, 3% coupon, and 3% SEC yield.

Now, suppose that the bond price drops to $900. The coupon is still 3%. The distribution yield is 3.33%, since that is the ratio of $30 to the new price of $900. The yield to maturity (which is used in calculating SEC yield) is much higher than 3.33%, because the $900 will earn $30 every year but will also increase to $1000 at maturity.

If you buy this bond, or buy a fund which holds this bond, you will only get the $30 payments in cash, but you will also get the benefit of the price increase from $900 to $1000, so your total return will be the yield to maturity.
Thanks David. That’s a great explanation.
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by dbr »

In any case it is worth understanding that bond funds are not savings accounts that simply pay out interest.

It might be best to start thinking of any investments on the bond fund side of the divide as instruments with (variable) return and not as "sources of income" based on dividends. That is true even though a bond per se is a simple instrument that pays interest and returns face value on a date. At what point one can just think of fixed income as different kinds of savings accounts is a discussion, I guess.
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by LMK5 »

We know that duration gives us an idea of how much the fund NAV will rise or fall for each 1% movement in interest rates. For VBIRX the duration is 2.7%. Has the fund NAV in fact decreased about 2.7% per 1% rise in rates for its average holding?
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by arcticpineapplecorp. »

LMK5 wrote: Mon Jun 12, 2023 10:26 am We know that duration gives us an idea of how much the fund NAV will rise or fall for each 1% movement in interest rates. For VBIRX the duration is 2.7%. Has the fund NAV in fact decreased about 2.7% per 1% rise in rates for its average holding?
worst drawdown for VBIRX in 2022 was 6.78%

does that help?
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by alluringreality »

LMK5 wrote: Mon Jun 12, 2023 10:26 am We know that duration gives us an idea of how much the fund NAV will rise or fall for each 1% movement in interest rates. For VBIRX the duration is 2.7%. Has the fund NAV in fact decreased about 2.7% per 1% rise in rates for its average holding?
I think it's safe to say the nominal decline has been less for the current drawdown. The following shows historical drawdown using monthly data. Glancing at the yield curve around the start and end listed, it seems rates around 2 to 3 years probably moved more than the simplification might suggest. My impression is that the reason for the difference largely amounts to the change happening over more than a year, rather than a shorter period of time.
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by Florida Orange »

dbr wrote: Mon Jun 12, 2023 8:43 am In any case it is worth understanding that bond funds are not savings accounts that simply pay out interest.

It might be best to start thinking of any investments on the bond fund side of the divide as instruments with (variable) return and not as "sources of income" based on dividends. That is true even though a bond per se is a simple instrument that pays interest and returns face value on a date. At what point one can just think of fixed income as different kinds of savings accounts is a discussion, I guess.
That's a valid point, but I don't completely agree. I sort of think of my bonds as savings accounts where the amount of money in the account and the interest rate have some volatility. Since interest rates and bond prices move in opposite directions, it's almost like a savings account where I get more interest on less money or less interest on more money.
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by zero_coupon »

LMK5 wrote: Sat Jun 10, 2023 12:00 pm Hoping to get some input from the fixed income gurus here. I own VBIRX and I'm trying to figure out why the distribution yield (2.24%) is so much lower than the YTM and the SEC yield. In short, since the NAV of the fund has gone down so much, why wouldn't the distribution yield be closer to market rates of similar individual bonds of 1-5 year maturities?

Below is the data on the fund. I'm hoping someone can explain why the disparity exists, and also if the distribution yield would eventually increase to current market rates (or the SEC yield) for like bonds if interest rates remained level:

1) Distribution yield: 2.24%
2) SEC yield: 4.48%
3) YTM: 4.3%
4) Average coupon: 2.4%
5) Average effective maturity: 2.8%
6) Average duration: 2.7 yrs.
Well, 6 months later, the distribution yield is up to 2.35%. The SEC yield has increased to 5.01%.
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by suemarkp »

And the NAV has increased from 9.89 to 10.10 -- a 2% increase.
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by zero_coupon »

suemarkp wrote: Fri Dec 29, 2023 1:34 pm And the NAV has increased from 9.89 to 10.10 -- a 2% increase.
Yes. Unfortunately, the previously proposed strategy may have caused one to "miss the boat":
suemarkp wrote: Sat Jun 10, 2023 3:16 pm Maybe when VBIRX SEC yield is above the settlement fund for a month or two I will buy more VBIRX.
Any plans to increase VBIRX allocation?
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by suemarkp »

zero_coupon wrote: Fri Dec 29, 2023 3:28 pm
suemarkp wrote: Fri Dec 29, 2023 1:34 pm And the NAV has increased from 9.89 to 10.10 -- a 2% increase.
Yes. Unfortunately, the previously proposed strategy may have caused one to "miss the boat":
suemarkp wrote: Sat Jun 10, 2023 3:16 pm Maybe when VBIRX SEC yield is above the settlement fund for a month or two I will buy more VBIRX.
Any plans to increase VBIRX allocation?
Not yet. It seems like the settlement fund is still a better deal, even considering the NAV increase for VBIRX. I will wait for VMFFX and VBIRX to get closer in SEC yield before I move back to VBIRX. The Fed is signaling it is going to wait 3-6 months before lowering rates, so I don't expect VMFFX to drop much until then. But data can change their plans quickly.
Mark | Somewhere in WA State
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by zero_coupon »

suemarkp wrote: Fri Dec 29, 2023 5:49 pm
zero_coupon wrote: Fri Dec 29, 2023 3:28 pm
suemarkp wrote: Fri Dec 29, 2023 1:34 pm And the NAV has increased from 9.89 to 10.10 -- a 2% increase.
Yes. Unfortunately, the previously proposed strategy may have caused one to "miss the boat":
suemarkp wrote: Sat Jun 10, 2023 3:16 pm Maybe when VBIRX SEC yield is above the settlement fund for a month or two I will buy more VBIRX.
Any plans to increase VBIRX allocation?
Not yet. It seems like the settlement fund is still a better deal, even considering the NAV increase for VBIRX. I will wait for VMFFX and VBIRX to get closer in SEC yield before I move back to VBIRX. The Fed is signaling it is going to wait 3-6 months before lowering rates, so I don't expect VMFFX to drop much until then. But data can change their plans quickly.
Sounds like a plan. But might not the VBIRX NAV continue increasing, thus making it better just to buy it now?
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by suemarkp »

It could, but you just dont know. Are 2 year treasuries going to have their rates go down or stay the same? The inverted yield curve has messed things up. If the Fed drops rates a quarter percent each meeting, it will still take a while for VMFXX to get below the 2 year rate. Rate drops could certainly make up the difference. I like the stability of the VMFXX NAV always being 1.
Mark | Somewhere in WA State
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by zero_coupon »

suemarkp wrote: Sat Dec 30, 2023 12:28 am It could, but you just dont know. Are 2 year treasuries going to have their rates go down or stay the same? The inverted yield curve has messed things up. If the Fed drops rates a quarter percent each meeting, it will still take a while for VMFXX to get below the 2 year rate. Rate drops could certainly make up the difference. I like the stability of the VMFXX NAV always being 1.
Good points. Looks like the 2-year yield is now 4.25%. When you mention "Rate drops could certainly make up the difference," are you referring to potential price increases of funds such as VBIRX, stemming from a potential decline of the 2-year yield?
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Re: Deciphering ST Bond Index Fund (VBIRX) Yield

Post by suemarkp »

Yes. The recent rate drop has increased the NAV of VBIRX, so im better off than I was as far as total yield. But when I bought VBIRX 3 or so years ago, the NAV was well over $10 and approaching $11. It isnt back there yet...
Mark | Somewhere in WA State
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