Which interest rate should I follow, and how should I follow it?

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Booper
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Which interest rate should I follow, and how should I follow it?

Post by Booper »

I recently purchased Vanguard's Short-Term Treasury Index Fund Admiral Shares (VSBSX) which "employs an indexing investment approach designed to track the performance of the Bloomberg US Treasury 1–3 Year Bond Index."

The fund has an SEC Yield of 2.53% but a YTD Total Return of -2.58%. The (dramatic) difference, I gather, is due to the recent (dramatic) rise in interest rates.

One of my goals with this purchase is to become better educated about interest rates and how they impact my investments.

I have passing familiarity with this stuff. For example, I know that there's a thing called "the yield curve". But I don't know how often it changes, or have a go-to website to check it out.

I just googled "time series data for 2-year treasury" and wound up here: https://ycharts.com/indicators/2_year_treasury_rate. The recent spike there certainly explains why the YTD Total Return of VSBSX is down. Is this the right graph for me to be following to understand how interest rates are impacting the NAV of VSBSX?

I guess that as an investor the big question for me is whether interest rates in the 1-3 year Bond Index will continue to rise this sharply or not. I guess I could figure that out by just looking at the NAV of my fund. But I think this seems like a case where I could figure out the answer by looking at the raw data. That interests me, but I'm just not sure how to do it.

Thanks.
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Beensabu
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Re: Which interest rate should I follow, and how should I follow it?

Post by Beensabu »

Check out the 2-year treasury yield for 2022 here:

https://home.treasury.gov/resource-cent ... value=2022

0.78 as of Jan 3rd

2.60 as of May 20th

1.82 increase in yield.

Average duration of VSBSX is 1.9 years. "General rule of thumb" is minus duration x every 1% increase in yield as a % to NAV.

1.82 x 1.9 = 3.46

So -2.58% isn't even as bad as you might have thought it could get.

Current yield to maturity is 2.7% and current effective maturity is 2 years. Try to think of it like that. Current balance at 2.7% interest for 2 years. Plus an extra year (maybe) for full return of principal, since it's a fund.

It's not exactly right, but it's close enough.

And perhaps consider that it may be unnecessary to follow any kind of interest rate when already invested in a short-term treasury fund. I mean... how much shorter duration are you going to go? 6-month CDs? Tbills? Cash? And based on what? There's a point where you don't really have to pay attention, unless it's trying to figure out when to lengthen the duration... But, that doesn't seem like your intent.

What is your intent?
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vineviz
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Re: Which interest rate should I follow, and how should I follow it?

Post by vineviz »

Booper wrote: Sun May 22, 2022 6:46 pm I guess that as an investor the big question for me is whether interest rates in the 1-3 year Bond Index will continue to rise this sharply or not. I guess I could figure that out by just looking at the NAV of my fund.
There is no way to figure out whether the yield on your bonds "will continue to rise" or not.

You can tell whether yields HAVE RISEN by looking at your fund's NAV, because it reflects the price of the bonds which (in turn) reflects the change in yields that have occurred.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Kevin M
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Re: Which interest rate should I follow, and how should I follow it?

Post by Kevin M »

Booper wrote: Sun May 22, 2022 6:46 pm I have passing familiarity with this stuff. For example, I know that there's a thing called "the yield curve". But I don't know how often it changes, or have a go-to website to check it out.
The yield curve that's most commonly referenced is the one published by the Treasury department. You've already been provided with the link. That yield curve shows yields for specific maturities from 1m to 30y. Since yields can change daily, the yield curve changes a bit daily. Here is a chart of the yield curve Friday compared to the beginning of the year:

Image
Booper wrote: Sun May 22, 2022 6:46 pm I just googled "time series data for 2-year treasury" and wound up here: https://ycharts.com/indicators/2_year_treasury_rate. The recent spike there certainly explains why the YTD Total Return of VSBSX is down. Is this the right graph for me to be following to understand how interest rates are impacting the NAV of VSBSX?
Change in the 2-year Treasury yield is not a bad for this purpose. My go to site for charts of all things Treasury related is FRED. Here is the last year for the 2-year Treasury.

Image

You can click on the graph and will be taken to the FRED website showing this graph. You could then change the time period, or add other maturities to the graph.
Booper wrote: Sun May 22, 2022 6:46 pm I guess that as an investor the big question for me is whether interest rates in the 1-3 year Bond Index will continue to rise this sharply or not. I guess I could figure that out by just looking at the NAV of my fund. But I think this seems like a case where I could figure out the answer by looking at the raw data. That interests me, but I'm just not sure how to do it.
As others have said, no one knows how the yield curve will change in the future. You can look at various time periods to see how it has changed in the past to get some idea of what could happen in the future. The FRED data goes back to 1976 for the 2-year, and further back for other maturities, like 5y and 10y.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Booper
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Re: Which interest rate should I follow, and how should I follow it?

Post by Booper »

Kevin M wrote: Sun May 22, 2022 7:45 pm
Booper wrote: Sun May 22, 2022 6:46 pm I have passing familiarity with this stuff. For example, I know that there's a thing called "the yield curve". But I don't know how often it changes, or have a go-to website to check it out.
The yield curve that's most commonly referenced is the one published by the Treasury department. You've already been provided with the link. That yield curve shows yields for specific maturities from 1m to 30y. Since yields can change daily, the yield curve changes a bit daily. Here is a chart of the yield curve Friday compared to the beginning of the year:

Image
Booper wrote: Sun May 22, 2022 6:46 pm I just googled "time series data for 2-year treasury" and wound up here: https://ycharts.com/indicators/2_year_treasury_rate. The recent spike there certainly explains why the YTD Total Return of VSBSX is down. Is this the right graph for me to be following to understand how interest rates are impacting the NAV of VSBSX?
Change in the 2-year Treasury yield is not a bad for this purpose. My go to site for charts of all things Treasury related is FRED. Here is the last year for the 2-year Treasury.

Image

You can click on the graph and will be taken to the FRED website showing this graph. You could then change the time period, or add other maturities to the graph.
Booper wrote: Sun May 22, 2022 6:46 pm I guess that as an investor the big question for me is whether interest rates in the 1-3 year Bond Index will continue to rise this sharply or not. I guess I could figure that out by just looking at the NAV of my fund. But I think this seems like a case where I could figure out the answer by looking at the raw data. That interests me, but I'm just not sure how to do it.
As others have said, no one knows how the yield curve will change in the future. You can look at various time periods to see how it has changed in the past to get some idea of what could happen in the future. The FRED data goes back to 1976 for the 2-year, and further back for other maturities, like 5y and 10y.

Kevin
Thanks Kevin! This answer really helped.

There's still one thing I dont fully understand, and I'm wondering if you can help. me with it.

When you say that the yield curve changes daily, I assume that this is because the market for treasuries is liquid and the change is due to market forces.

I also understand that there are regularly scheduled auctions for bonds in my index.

My question is: are the auctions significant events that will impact the index my fund tracks? Or are they no more or less significant than the trading that happens every day in the secondary markets?
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Kevin M
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Re: Which interest rate should I follow, and how should I follow it?

Post by Kevin M »

Booper wrote: Mon May 23, 2022 10:27 am
Kevin M wrote: Sun May 22, 2022 7:45 pm
Booper wrote: Sun May 22, 2022 6:46 pm I have passing familiarity with this stuff. For example, I know that there's a thing called "the yield curve". But I don't know how often it changes, or have a go-to website to check it out.
The yield curve that's most commonly referenced is the one published by the Treasury department. You've already been provided with the link. That yield curve shows yields for specific maturities from 1m to 30y. Since yields can change daily, the yield curve changes a bit daily. Here is a chart of the yield curve Friday compared to the beginning of the year:

Image
Booper wrote: Sun May 22, 2022 6:46 pm I just googled "time series data for 2-year treasury" and wound up here: https://ycharts.com/indicators/2_year_treasury_rate. The recent spike there certainly explains why the YTD Total Return of VSBSX is down. Is this the right graph for me to be following to understand how interest rates are impacting the NAV of VSBSX?
Change in the 2-year Treasury yield is not a bad for this purpose. My go to site for charts of all things Treasury related is FRED. Here is the last year for the 2-year Treasury.

Image

You can click on the graph and will be taken to the FRED website showing this graph. You could then change the time period, or add other maturities to the graph.
Booper wrote: Sun May 22, 2022 6:46 pm I guess that as an investor the big question for me is whether interest rates in the 1-3 year Bond Index will continue to rise this sharply or not. I guess I could figure that out by just looking at the NAV of my fund. But I think this seems like a case where I could figure out the answer by looking at the raw data. That interests me, but I'm just not sure how to do it.
As others have said, no one knows how the yield curve will change in the future. You can look at various time periods to see how it has changed in the past to get some idea of what could happen in the future. The FRED data goes back to 1976 for the 2-year, and further back for other maturities, like 5y and 10y.

Kevin
Thanks Kevin! This answer really helped.

There's still one thing I dont fully understand, and I'm wondering if you can help. me with it.

When you say that the yield curve changes daily, I assume that this is because the market for treasuries is liquid and the change is due to market forces.

I also understand that there are regularly scheduled auctions for bonds in my index.

My question is: are the auctions significant events that will impact the index my fund tracks? Or are they no more or less significant than the trading that happens every day in the secondary markets?
Yes, Treasuries trade daily, so prices/yields change daily, and the yield curve is based on market quotes.

The yields published by Treasury are Constant Maturity Treasury (CMT) yields. For example, they publish a 10-year yield, but there is no Treasury available with exactly 10 years to maturity, so they use an algorithm to come up with a 10-year yield based on bid quotes for maturities that are as close as possible, taking into account the coupon rate. The CMT yields are par yields, meaning that it assumed that the coupon rate equals the yield. The quotes they use are obtained from the secondary market at about 3:30 pm ET.

Since the CMT yield curve is based market quotes, it is by definition dependent on the market.

After an auction for a new issue, that new issue becomes one of the Treasuries traded, and would be used as an input to determine the CMT yield for the most similar maturity. The auction yield may influence the secondary market yield for this Treasury. Other than this, an auction has no impact on the values of the bonds in a Treasury fund that I can think of.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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burritoLover
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Re: Which interest rate should I follow, and how should I follow it?

Post by burritoLover »

Booper wrote: Sun May 22, 2022 6:46 pm I recently purchased Vanguard's Short-Term Treasury Index Fund Admiral Shares (VSBSX) which "employs an indexing investment approach designed to track the performance of the Bloomberg US Treasury 1–3 Year Bond Index."

The fund has an SEC Yield of 2.53% but a YTD Total Return of -2.58%. The (dramatic) difference, I gather, is due to the recent (dramatic) rise in interest rates.

One of my goals with this purchase is to become better educated about interest rates and how they impact my investments.

I have passing familiarity with this stuff. For example, I know that there's a thing called "the yield curve". But I don't know how often it changes, or have a go-to website to check it out.

I just googled "time series data for 2-year treasury" and wound up here: https://ycharts.com/indicators/2_year_treasury_rate. The recent spike there certainly explains why the YTD Total Return of VSBSX is down. Is this the right graph for me to be following to understand how interest rates are impacting the NAV of VSBSX?

I guess that as an investor the big question for me is whether interest rates in the 1-3 year Bond Index will continue to rise this sharply or not. I guess I could figure that out by just looking at the NAV of my fund. But I think this seems like a case where I could figure out the answer by looking at the raw data. That interests me, but I'm just not sure how to do it.

Thanks.
You are not investing - you are speculating. The bond market is impossible to time - you can't predict interest rates, bond yields, the yield curve or anything else. You should not be buying or selling bonds based on any current or future predicted market conditions.
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happysteward
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Re: Which interest rate should I follow, and how should I follow it?

Post by happysteward »

Booper wrote: Sun May 22, 2022 6:46 pm But I think this seems like a case where I could figure out the answer by looking at the raw data. That interests me, but I'm just not sure how to do it.

Thanks.
I follow the 10 year treasury index ^TNX to help me gauge what is going on, it has been helpful to me, there are indices for other maturities as well (2 year, 5 year, 30 year).
"How much money is enough?", John Rockefeller responded, "...just a little bit more."
Topic Author
Booper
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Re: Which interest rate should I follow, and how should I follow it?

Post by Booper »

happysteward wrote: Tue May 24, 2022 7:04 am
Booper wrote: Sun May 22, 2022 6:46 pm But I think this seems like a case where I could figure out the answer by looking at the raw data. That interests me, but I'm just not sure how to do it.

Thanks.
I follow the 10 year treasury index ^TNX to help me gauge what is going on, it has been helpful to me, there are indices for other maturities as well (2 year, 5 year, 30 year).
Thank you! I see that the ticker for the 2-year yield is US2Y. I look forward to following this part of the market. If you look at a site like here:

https://www.cnbc.com/quotes/US2Y

You can see that something historic either just happened there (or is continuing to happen). I'm looking forward to following it.
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LTCM
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Re: Which interest rate should I follow, and how should I follow it?

Post by LTCM »

You can look up forward rates for bonds and they will show where the market thinks yields will be at a certain date in the future. That prediction is already priced into the current market of course.
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aristotelian
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Re: Which interest rate should I follow, and how should I follow it?

Post by aristotelian »

I agree, the Treasury yield curve is the most indicative of market expectations. That said, expectations are only that. I would try to get over any notion that you might be able to time the market or otherwise benefit from "following" interest rates.
dbr
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Re: Which interest rate should I follow, and how should I follow it?

Post by dbr »

When looking at a bond fund don't you have to break down to the actual inventory of bonds in the fund to know what to look at?
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