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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Comments (1) -

May 02, 2012 22:47 #

That was an excellent write up. The information you shared is helpful for every investor. We actually tend to make investments depending upon the progress chart for a long period of time to be sure that we are not making any mistakes investing into a particular bond. But these charts are not helpful while deciding yield to maturity.

EMHpe United States

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