Yield To Maturity Charts Don't Tell The Full Story

May 05, 2011 in Bonds

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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PIMCO Total Return Fund Lookback

Apr 21, 2011 in Bonds

PIMCO's flagship fund PTTRX, the largest mutual fund in the world, filed for an active ETF yesterday. We have followed PIMCO in general for many years and find it a good example of a strategy based on tactical exposures. Note that Bill Gross is definitely NOT from the passive 'allocate and rebalance' school of portfolio management. PIMCO alters exposures consistent with its tactical views, often aggressively. This is by the way, really what index ETFs are perfectly suited to do.

2010 was something of an off-year for PIMCO Total Return, it slightly underperformed some generic treasury and corporate bond index funds. Prior to 2010, PTTRX had been performing between the return of Intermediate Treasuries and Intermediate Corporate Bonds in each of the prior 2 years. That is, Gross was able to favorably rotate between the better of the two funds. Lets take a closer look in a quick slideshow.


Click Lower Left 'Menu' Button To View Full Screen.

We would note that you can enter a few of these bond funds into ETFreplay.com relative strength models and see how well some of these strategies work. Keep in mind you do also have many other return enhancement ETFs available with junk bonds, preferred stocks, emerging market bonds, foreign soverign and foreign credit bonds etc...

While we have been highlighting commodities for many months (something of the antithesis of fixed-income), we thought we would mention that for more conservative balanced accounts, there are an increasing number of excellent, targeted, tactical bond strategies available in ETF form.

Note: we have added the ability to backtest 50 ETFs together at once and our backtesting reports have added many new features over the past few weeks. Take a look on the Backtest App Menu



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Bond ETF Investing And The Debate Over Long-Term Treasuries: Don’t Get Distracted.

Aug 29, 2010 in Bonds

We have watched with amusement all the discussion of bond ETF investing as it relates to ‘bubbles.’  Remember that the bond market as defined by the Aggregate Bond Index has a duration[1] in the 4-5 year range.   This is where the real investable bond market is – not 30 year treasuries.  

Indeed, by our ETF database (which covers >96% of overall ETF/ETN assets), we see that less than 10% of total treasury bond ETF assets are in bond funds with durations greater than 10 years.  Our overall weighted average estimate of the duration of ETF investors aggregate duration in the Treasury bond grouping is 4.9 years.

Now, it IS true that the risk of drawdown for 10- 30 year bonds becomes more significant after a parabolic spike up like the one we have been in – but this should be obvious as this is just the nature of volatility.   Long duration bonds are very volatile securities – and when a highly volatile security goes parabolic, drawdown risk will increase.  We find it irrelevant and distracting to listen to this talk of bond bubbles and more practical to think in terms of actual drawdowns within the bond market sub-segments.    

Here is an ETF Volatility Chart of relative volatilites across some different kinds of ETFs. We included IEI (~4-5 year duration U.S. Treasury ETF) because it represents the weighted average duration of all Treasury bond ETF investor assets:



[1] Duration measures how fast you are to be paid your money back.  It adjusts for the stated coupon so that if your bond pays a high coupon, the duration is lower as you are being repaid more quickly and therefore the variability of possible cash flows is reduced. 



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What are the differences between the Treasury Bond ETFs?

May 17, 2010 in Bonds

Richard Bernstein, the long-time market strategist from Merrill Lynch, has said many times that ‘U.S. Treasuries are the only true diversifying asset.’ We wanted to make a few more specific comments that add to the discussion with regard to US Treasury ETFs.

First, there is a very large difference between a short or intermediate 3-7 year type of treasury security and a 10-30 year long-term bond. The term ‘US Treasury’ is too vague to actually be practical. The short and long-term Treasury ETFs are really entirely different categories of securities.

The ETF world has securities all up and down the maturity spectrum. Let’s look at an extreme example to help understand what we are talking about: EDV (the Vanguard Extended Duration ETF) had a very large -41% high to low daily closing move (drawdown) in 2009. ‘Maximum drawdown’ is a nice, easy way to think about ‘risk’ --- everyone can understand it intuitively: When this asset class goes down, how much does XYZ go down vs others in the same asset class?

At the same time EDV was dropping -41%, the iShares 3-7 year Treasury bond ETFs largest drawdown was -6%. Maximum drawdown is the amount of loss if you bought the exact closing high and sold the subsequent exact closing low (the worst trade possible based on closing prices). While certainly far from perfect, this is a useful way for investors to at least incorporate some type of risk analysis into their thinking. Discussing returns without the context of risk is a common error made by investors across all segments of the industry.

As a general rule, you should avoid the highest volatility securities as these will tend to have the largest drawdowns -- and the ultimate goal is to think in terms of reward and risk – not just return.

Long-term bonds are quite tricky to analyze, given their low yields and highly volatile nature. Intermediate-term bonds (treasuries and non-treasury bond ETFs) are much more straightforward. If your timing is off, the penalty for this is much lower as this maturity zone won’t drop much when the equity markets are rising. But more importantly, this group will offer a nice hedge for nearly any other security you hold.

This table summarizes a list of U.S. Treasury ETFs and their Maximum drawdowns over the past few years:

Note: EDV had a very large capital gains distribution in 2009. Be aware that if you look at this on a regular charting platform that doesn’t adjust ETF for total return, the chart will not be representative of the underlying index that the ETF is tracking.

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Foreigners Buying US Bond Indexes

Jan 26, 2010 in Bonds

What has currency done to US bond market returns for foreign investors? While various currencies have performed notably differently, the overall Deutsche Bank Dollar Index ETF is a good proxy to make a weighted judgment of overall effect. Since February 2007, when the UUP was launched, there has been a depreciation of the dollar of about -6%. With domestic currency bond market index returns in the +17 to +19% over this period and understanding that some currencies fared much better or worse than the underlying DB dollar index, you can see that currency can be quite a meaningful contribution to overall return.


To update this chart to today or visualize similar relationships using other ETF combinations, go here: http://www.etfreplay.com/charts.aspx



How Risky Are Intermediate Term Bond ETFs?

Jan 20, 2010 in Bonds | Volatility

This particular ETF, Barclays 3-7 Year Treasury Bond ETF (symbol IEI) with a stated effective duration of approximately 4.5 years, had daily standard deviation of 5.5% in 2009. While yields on treasuries are low -- duration management below 5 years is inherently low relative risk.




Some creativity in non-equities in 2009s equity bull market

Jan 04, 2010 in Bonds


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