Vanguard US bond funds and investor fund flows

In 2013 interest rates on US bonds rose, as shown by bellwether treasury bond yields tabulated below. We will explore how this rise in yields affected Vanguard bond fund returns, and how investors reacted to these effects.

Bond maturity Yields on January 31, 2013 Yields on January 31, 2014
2 year 0.26% 0.35%
3 year 0.40% 0.70%
5 year 0.88% 1.51%
10 year 1.99% 2.70%
30 year 3.17% 3.64%

Vanguard bond funds

As a result of rising interest rates in 2013, the principal value of existing bonds dropped. This pricing action is seen in the negative capital returns of Vanguard bond funds.

The tables below show the capital returns (column three) and total returns (column four) of Vanguard long-term, intermediate-term and short-term bond funds (investor shares), as disclosed in the funds’ annual reports (fiscal year shown in column two).

A fifth column, shareholder redemption,  shows whether fund investors were net buyers or sellers of a fund.

Long-term bonds

Vanguard long-term bond funds experienced capital losses commensurate with their bond duration. In terms of total return, only the  long-term investment grade fund eked out a positive return.

Interestingly, investors were net buyers of the long-term investment grade fund, which offers only investor and admiral shares. Institutional investors were net buyers of the long-term bond index fund; these purchases surpassed the net sales made by holders of investor and etf sales.

Long-term bonds

Fund Fiscal year end Capital return Total return Shareholder redemption
Long treasury 1/31/14 -7.42% -4.45% (836,804,000)
Long investment grade 1/31/14 -5.05% 0.41% 597,714,000
Long municipal 10/31/13 -5.75% -2.07% (354,104,000)
TIPs 12/31/13 -10.80% -8.92% (14,302,821,000)
Long bond index 12/31/13 -12.89% -9.13% 846,553,000
Intermediate-term bonds

Popular asset allocation model portfolios, such as the three-fund portfolio, core four portfolio, and other lazy portfolios, call for investment in intermediate-term bond funds.

Note that shareholders were net sellers of all intermediate-term bond funds.

Intermediate-term bonds

Fund Fiscal year end Capital return Total return Shareholder redemption
Intermediate treasury 1/31/14 -2.21% -0.74% (769,024,000)
Intermediate investment grade 1/31/14 -2.31% 0.85% (1,939,117,000)
Intermediate municipal 10/31/13 -3.96% -0.96% (1,985,204,000)
GNMA 1/31/14 -1.94% 0.34% (11,165,222,000)
High-yield 1/31/14 -1.31% 4.53% (1,713,991,000)
Intermediate bond index 12/31/13 -6.25% -3.54% (1,529,103,000)
Total bond index 12/31/13 -4.55% -2.26% (2,974,985,000)
Short-term bonds

Short-term bond funds produced positive total returns for the fiscal year. With the sole exception of the short-term federal fund, investors were net buyers of short-term bond funds.

Short-term bonds

Fund Fiscal year end Capital return Total return Shareholder redemption
Short treasury 1/31/14 -0.08% 0.28% 196,641,000
Short federal 1/31/14 -0.32% 0.22% (420,014,000)
Short investment grade 1/31/14 -0.36% 1.46% 1,340,536,000
Limited-term municipal 10/31/13 -1.07% 0.60% 1,470,493,000
Short TIPs 9/31/13 -1.01% 0.91% 6,736,835,000
Short bond index 12/31/13 -1.03% 0.07% 8,344,652,000
Net investor fund flows

How might we account for net investor bond fund flows in 2013?

1. Not by buy-hold-and-rebalancing. Investors who have a set portfolio allocation between stocks and bonds, and who adhere to a buy-hold-and-rebalance investment strategy, will reallocate asset allocations back to target allocations when market movements cause the portfolio allocation to move out of balance.

Thus, in a year in which equity returns were high-the US stock market (+33.5%) and  developed markets (+22.8%)- and bond market returns low, these buy and hold investors would be buying bonds to rebalance the portfolio.

2. Tax loss harvesting?  While eight funds had negative total returns for 2013, tax loss harvesting likely accounts for a small part of redemption activity. For taxable bond funds, an undisclosed percentage of assets are held in tax-deferred accounts, where tax selling is meaningless.

Furthermore, the  increase in interest rates in 2013 comes after a period of falling rates.  For long-held municipal fund shares, the decrease in share price may have simply reduced the built up gain without producing a loss.

Vanguard municipal bond fund closing net asset values

Fund 2013 2012 2011 2010 2009
Intermediate municipal 13.84 14.41 13.75 13.80 13.38
Long municipal 10.63 11.29 10.53 10.67 10.26

3. Inflows to stocks and short-term bonds. In 2013 investors were net purchasers of Vanguard US stock index funds, developed market stock index funds, and almost all short-term bond funds.

It is not disclosed how or when investors used the proceeds from their bond fund redemption and purchases, but according to Morningstar, dollar-weighted bond fund investor returns were lower than bond fund total returns for all of the funds above, with only one exception, the Vanguard short term inflation indexed bond fund.

This indicates that investors were not successful in timing the bond markets.

About

Barry Barnitz, administrator of both the Bogleheads® wiki and of Financial Page, a Bogleheads® blog

Posted in Bonds
September 2014
M T W T F S S
« Aug   Oct »
1234567
891011121314
15161718192021
22232425262728
2930  
Categories
Archives
Follow Financial Page on WordPress.com
%d bloggers like this: