May 05, 2011
Something to consider with bond funds.
You will often see charts in blogs and articles of 10 or 30-year bond yields plotted over time -- but from an investment perspective and when considering portfolio performance, realize that the 'meat' of the bond market is only remotely related to the 30-year. The AGGREGATE bond market is a collection of bonds with an average maturity in the 4-5 year range. There actually is not a single bond in the iShares Aggregate (AGG) with a stated duration anything approaching even 20 years. None.
The 5-year yield is a good place to focus. As of yesterday, this was 1.95%. We scanned the history and found that on June 7, 2010 -- the yield was the same at 1.95%. So we have unchanged TREASURY yields since then.
But treasury bonds are just one piece of the landscape (an important piece but there are of course many others). Below is a comparison of a few bond funds total return series since June 7, 2010. Viewing the total return chart is not the same thing as viewing a yield to maturity time series. We would say that the total return is much more applicable in terms of understanding movement --- as this does not strip out the distributions you earn along the way and will reflect changes in credit spreads automatically. Total return charts are not just for bond funds obviously -- they are better for any investment that produces a cash flow. The total return series (which is what indexes are) is a cleaner reflection of how investments perform --- and performance is what matters.
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