VBTLX / BND distribution yield

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stocknoob4111
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VBTLX / BND distribution yield

Post by stocknoob4111 »

Just like all bond funds VBTLX (Vanguard Total Bond) has been decimated this year with a total return inflation adjusted YTD of almost -20%

My question is the current distribution yield is only 2.8% which is even lower than a savings account now. The SEC yield is 4.15% which seems in line with duration. The distribution is rising extremely slowly, how long do you think it will take for the distribution to reach the SEC yield? Or is this information unknown?
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grabiner
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Re: VBTLX / BND distribution yield

Post by grabiner »

The distributions on a bond are set when a fund buys a bond. Thus, if interest rates do not change, the distribution yield will increase every time the fund sells a bond and buys a new bond with a higher yield, but it will not equal the SEC yield until the fund has turned over all its bonds.

However, the total return is not affected by these yield changes. Since rates rose recently, the fund currently holds mostly bonds which are worth less than the par value. The SEC yield includes the coupon payments on those bonds, but it also includes the increase in principal. If the yields on the bonds in the fund do not change in the next year, your return will be equal to the SEC yield, with the fund price increasing by the difference between the SEC yield and the distribution amount.
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Kevin M
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Re: VBTLX / BND distribution yield

Post by Kevin M »

grabiner wrote: Sat Dec 10, 2022 3:48 pm The distributions on a bond are set when a fund buys a bond. Thus, if interest rates do not change, the distribution yield will increase every time the fund sells a bond and buys a new bond with a higher yield, but it will not equal the SEC yield until the fund has turned over all its bonds.
It's the higher coupon (not yield) of new bonds that increases the distribution yield. The yields of the bonds already in the fund have risen too, which increases the SEC yield, but the coupons are fixed, and that's one component of the distribution yield.

The other component is the average price or NAV over the previous calendar month (at least for the way Vanguard calculates it). So if the NAV declines but the coupon payments remain the same, the distribution yield will increase.

Note that fund distributions also include accrued market discount (increases distribution) and amortized bond premium (decreases distribution), but these also are fixed at purchase.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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stocknoob4111
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Re: VBTLX / BND distribution yield

Post by stocknoob4111 »

Thanks, I was assuming that since I lost principal I would get that back with increase in yield over duration, for example duration is 6 years and rates rise 1%, I lose 6% right away but my yield rises 1% also right away.... Well, that was the expectation but I guess it's not as straightforward as that.
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Re: VBTLX / BND distribution yield

Post by MrJedi »

stocknoob4111 wrote: Sat Dec 10, 2022 10:28 pm Thanks, I was assuming that since I lost principal I would get that back with increase in yield over duration, for example duration is 6 years and rates rise 1%, I lose 6% right away but my yield rises 1% also right away.... Well, that was the expectation but I guess it's not as straightforward as that.
Some of the yield comes from the principal recovery as the old bonds mature. Not coupon/distribution.

It is similar to how an individual bond will lose value when rates increase. But it recovers over time until maturity since the par value can be recovered at maturity. During that time the coupon doesn't change.
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Re: VBTLX / BND distribution yield

Post by grabiner »

MrJedi wrote: Sun Dec 11, 2022 6:01 am
stocknoob4111 wrote: Sat Dec 10, 2022 10:28 pm Thanks, I was assuming that since I lost principal I would get that back with increase in yield over duration, for example duration is 6 years and rates rise 1%, I lose 6% right away but my yield rises 1% also right away.... Well, that was the expectation but I guess it's not as straightforward as that.
Some of the yield comes from the principal recovery as the old bonds mature. Not coupon/distribution.

It is similar to how an individual bond will lose value when rates increase. But it recovers over time until maturity since the par value can be recovered at maturity. During that time the coupon doesn't change.
It's easiest to see this with an individual bond. If you buy a bond for $1000, and interest rates increase dropping the bond price to $900, you have lost 10%. If you hold the bond to maturity, you will still get the same coupons as when you bought the bond, but the price will rise back to $1000 when the bond matures. Your total return will be essentially the same as if rates hadn't changed. (You will actually be slightly better off, because the coupons give the bond a duration shorter than its maturity. You will get the same $1000 principal at maturity no matter what happens to interest rates, but if rates rise, you can reinvest the coupons at higher rates.)
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Kevin M
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Re: VBTLX / BND distribution yield

Post by Kevin M »

stocknoob4111 wrote: Sat Dec 10, 2022 10:28 pm Thanks, I was assuming that since I lost principal I would get that back with increase in yield over duration, for example duration is 6 years and rates rise 1%, I lose 6% right away but my yield rises 1% also right away.... Well, that was the expectation but I guess it's not as straightforward as that.
It works about that way for a one-time change in yield (technically a one-time parallel shift in the yield curve relevant for the fund), but yield doesn't just change once and then not change for another six years. This is why we can't really know the point of indifference for a bond fund.
If I make a calculation error, #Cruncher probably will let me know.
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Re: VBTLX / BND distribution yield

Post by dbr »

Kevin M wrote: Sun Dec 11, 2022 12:48 pm
stocknoob4111 wrote: Sat Dec 10, 2022 10:28 pm Thanks, I was assuming that since I lost principal I would get that back with increase in yield over duration, for example duration is 6 years and rates rise 1%, I lose 6% right away but my yield rises 1% also right away.... Well, that was the expectation but I guess it's not as straightforward as that.
It works about that way for a one-time change in yield (technically a one-time parallel shift in the yield curve relevant for the fund), but yield doesn't just change once and then not change for another six years. This is why we can't really know the point of indifference for a bond fund.
Kevin, the standard definition of modified duration as the log derivative of bond price with respect to yield tells us the instant response of price to change in yield. But we have had a lot of discussion of the fact that after such a change and with no further change in interest rates the value of a bond holding with interest reinvested will recover in direction opposite to the original jump change and even reach a point of indifference compared to the situation had interest rates not changed. In more complicated situations this time evolving response is superimposed on further instant responses to further yield changes.

So the question is, do you know of a reference to where that process is treated in financial mathematics? The phenomenon should be similar how dynamic systems respond after an external impulse, such as how a bell rings after being struck, and so on. A dynamic system can be driven by a constanty changing impulse and have a very complicated time dependent response. Is there an analogy to that anaysis in bond math?
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Re: VBTLX / BND distribution yield

Post by Kevin M »

dbr wrote: Sun Dec 11, 2022 7:42 pm
Kevin M wrote: Sun Dec 11, 2022 12:48 pm
stocknoob4111 wrote: Sat Dec 10, 2022 10:28 pm Thanks, I was assuming that since I lost principal I would get that back with increase in yield over duration, for example duration is 6 years and rates rise 1%, I lose 6% right away but my yield rises 1% also right away.... Well, that was the expectation but I guess it's not as straightforward as that.
It works about that way for a one-time change in yield (technically a one-time parallel shift in the yield curve relevant for the fund), but yield doesn't just change once and then not change for another six years. This is why we can't really know the point of indifference for a bond fund.
Kevin, the standard definition of modified duration as the log derivative of bond price with respect to yield tells us the instant response of price to change in yield. But we have had a lot of discussion of the fact that after such a change and with no further change in interest rates the value of a bond holding with interest reinvested will recover in direction opposite to the original jump change and even reach a point of indifference compared to the situation had interest rates not changed. In more complicated situations this time evolving response is superimposed on further instant responses to further yield changes.

So the question is, do you know of a reference to where that process is treated in financial mathematics? The phenomenon should be similar how dynamic systems respond after an external impulse, such as how a bell rings after being struck, and so on. A dynamic system can be driven by a constanty changing impulse and have a very complicated time dependent response. Is there an analogy to that anaysis in bond math?
I think you have at least as good an understanding of bond math as I do, but I grabbed one of my investing text books, and reviewed some of the section on bond portfolio management.

Using modified duration as a bond portfolio management tool comes up in the section on bond portfolio immunization from interest rate changes. A key takeaway is that this is a very active bond management strategy that requires frequent rebalancing to maintain a modified duration that is equal to the continuously shrinking investment horizon. You don't get that by holding a single bond fund that maintains an approximately fixed duration.

We see something along these lines recommended here, which is to hold a long-term and short/mid-term TIPS fund, along with a cash or very short-term bond fund, and to periodically rebalance to keep your duration matched to your investment horizon.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
dbr
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Re: VBTLX / BND distribution yield

Post by dbr »

Kevin M wrote: Mon Dec 12, 2022 11:53 am
dbr wrote: Sun Dec 11, 2022 7:42 pm
Kevin M wrote: Sun Dec 11, 2022 12:48 pm
stocknoob4111 wrote: Sat Dec 10, 2022 10:28 pm Thanks, I was assuming that since I lost principal I would get that back with increase in yield over duration, for example duration is 6 years and rates rise 1%, I lose 6% right away but my yield rises 1% also right away.... Well, that was the expectation but I guess it's not as straightforward as that.
It works about that way for a one-time change in yield (technically a one-time parallel shift in the yield curve relevant for the fund), but yield doesn't just change once and then not change for another six years. This is why we can't really know the point of indifference for a bond fund.
Kevin, the standard definition of modified duration as the log derivative of bond price with respect to yield tells us the instant response of price to change in yield. But we have had a lot of discussion of the fact that after such a change and with no further change in interest rates the value of a bond holding with interest reinvested will recover in direction opposite to the original jump change and even reach a point of indifference compared to the situation had interest rates not changed. In more complicated situations this time evolving response is superimposed on further instant responses to further yield changes.

So the question is, do you know of a reference to where that process is treated in financial mathematics? The phenomenon should be similar how dynamic systems respond after an external impulse, such as how a bell rings after being struck, and so on. A dynamic system can be driven by a constanty changing impulse and have a very complicated time dependent response. Is there an analogy to that anaysis in bond math?
I think you have at least as good an understanding of bond math as I do, but I grabbed one of my investing text books, and reviewed some of the section on bond portfolio management.

Using modified duration as a bond portfolio management tool comes up in the section on bond portfolio immunization from interest rate changes. A key takeaway is that this is a very active bond management strategy that requires frequent rebalancing to maintain a modified duration that is equal to the continuously shrinking investment horizon. You don't get that by holding a single bond fund that maintains an approximately fixed duration.

We see something along these lines recommended here, which is to hold a long-term and short/mid-term TIPS fund, along with a cash or very short-term bond fund, and to periodically rebalance to keep your duration matched to your investment horizon.

Kevin
Thanks I appreciate the feedback.
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