TLT - Why Is Income from Govt Obligations so LOW?

Discussion of the Bond portion of the Permanent Portfolio

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chrikenn
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TLT - Why Is Income from Govt Obligations so LOW?

Post by chrikenn » Sat Feb 25, 2012 9:21 am

I've been working on my taxes and recently received my 1099 for TLT (I hold some in a taxable account because I have very little tax-deferred space).  I notice that the iShares tax information sheet shows that ONLY 62.89% of income is derived from U.S. Government Obligations (and therefore shielded from state tax in most states).  IEF and IEI (medium term bonds) are even lower -- close to 50%.

Anybody know how or why such a small percentage of income from these funds is derived from U.S. Government Obligations?  I would expect it to be closer to, say, 100%.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by MediumTex » Sat Feb 25, 2012 4:51 pm

I assume the rest would be from capital gains, right?
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by chrikenn » Sat Feb 25, 2012 5:10 pm

MediumTex wrote: I assume the rest would be from capital gains, right?

No, I'm not talking about my personal interest/gains.  I'm talking about the actual iShares 2011 tax information sheet that shows the percentage of income derived from U.S. Government Obligations.

Here's Vanguard's: http://www.vanguard.com/pdf/usgo_2011.p ... omain=true.  Notice that the Long-term Government Bond Index is 94%.

Here's iShares: http://us.ishares.com/content/stream.js ... cation/pdf.  Notice IEI, IEF around 50%, and TLT slightly higher.

Does that make my question more clear?  I don't think it has anything to do with capital gains.

The impact of this is that if a person receives, say, $10,000 in interest payments in 2011 from TLT, only $6,289 of it (not the full $10,000) is deductible from state taxes.  Compare to Vanguard, for example, where 94% is derived from Government Obligations... $9,400 of that $10,000 would be deductible from state taxes.
Last edited by chrikenn on Sat Feb 25, 2012 5:12 pm, edited 1 time in total.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by MediumTex » Sat Feb 25, 2012 5:22 pm

What I meant was the capital gains generated within the fund as it buys and sells bonds to maintain the appropriate bond duration.

If it's not capital gains within the fund, I have no idea where the other income would be coming from.

I don't know how you would get non-treasury dividends from a portfolio that is 100% treasury bonds.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by chrikenn » Sat Feb 25, 2012 6:15 pm

MediumTex wrote: What I meant was the capital gains generated within the fund as it buys and sells bonds to maintain the appropriate bond duration.

If it's not capital gains within the fund, I have no idea where the other income would be coming from.

I don't know how you would get non-treasury dividends from a portfolio that is 100% treasury bonds.
Oh, ok.  I guess that could be it.  I don't think it is though, because I think those distributions would be classified as capital gains distributions rather than interest payments.  Also, as it is they are only paying a couple % interest... if nearly half of that were attributable to capital gains, the interest rates would be really, really low.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by rickb » Sat Feb 25, 2012 7:08 pm

Income from loaning the bonds it holds?
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Tortoise » Sat Feb 25, 2012 7:10 pm

Yes, TLT's prospectus says they may lend out up to 1/3 of the fund's total assets. Maybe the fund is deriving a lot of income from that.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by MediumTex » Sat Feb 25, 2012 7:16 pm

Tortoise wrote: Yes, TLT's prospectus says they may lend out up to 1/3 of the fund's total assets. Maybe the fund is deriving a lot of income from that.
Hopefully someone will come up with something definitive on this question.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by WildAboutHarry » Mon Feb 27, 2012 7:35 am

This is potentially very distressing :-[

I use SHY and TLT in my HSA account to avoid California Income Taxes on the HSA income.  If the returns from the funds are not substantially from U.S. Treasuries then that fraction of income may be taxable.

Yet another counter party risk.
It is the settled policy of America, that as peace is better than war, war is better than tribute.  The United States, while they wish for war with no nation, will buy peace with none"  James Madison
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by WildAboutHarry » Tue Feb 28, 2012 10:19 am

I'm surprised this information has not raised a s***storm here.

Where is the other income for TLT, SHY, et al. coming from?  Once again, this raises the issue of counterparty risk in mutual funds.

If the substantial additional income in these funds is derived from non-treasury-bond-interest-payment sources, TLT and SHY do not appear to be suitable for use in an HBPP.
It is the settled policy of America, that as peace is better than war, war is better than tribute.  The United States, while they wish for war with no nation, will buy peace with none"  James Madison
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by moda0306 » Tue Feb 28, 2012 10:25 am

WAH,

I agree... Put me in the camp that's lazily waiting for someone with more gung-ho to figure this out.

And I was pissed a few months back when we found out they could lend these funds.

I suppose as a tax accountant I should be the one to spearhead this b!tch.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by WildAboutHarry » Tue Feb 28, 2012 10:38 am

moda0306 wrote:I suppose as a tax accountant I should be the one to spearhead this b!tch.
By all means!
It is the settled policy of America, that as peace is better than war, war is better than tribute.  The United States, while they wish for war with no nation, will buy peace with none"  James Madison
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