TLT - Why Is Income from Govt Obligations so LOW?

Discussion of the Bond portion of the Permanent Portfolio

Moderator: Global Moderator

chrikenn
Full Member
Full Member
Posts: 57
Joined: Fri Jan 28, 2011 10:41 am

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%.
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

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?
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
chrikenn
Full Member
Full Member
Posts: 57
Joined: Fri Jan 28, 2011 10:41 am

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.
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

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.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
chrikenn
Full Member
Full Member
Posts: 57
Joined: Fri Jan 28, 2011 10:41 am

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.
rickb
Executive Member
Executive Member
Posts: 762
Joined: Mon Apr 26, 2010 12:12 am

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?
User avatar
Tortoise
Executive Member
Executive Member
Posts: 2751
Joined: Sat Nov 06, 2010 2:35 am

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.
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

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.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
User avatar
WildAboutHarry
Executive Member
Executive Member
Posts: 1090
Joined: Wed May 04, 2011 9:35 am

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
User avatar
WildAboutHarry
Executive Member
Executive Member
Posts: 1090
Joined: Wed May 04, 2011 9:35 am

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
User avatar
moda0306
Executive Member
Executive Member
Posts: 7680
Joined: Mon Oct 25, 2010 9:05 pm
Location: Minnesota

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.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

- Thomas Paine
User avatar
WildAboutHarry
Executive Member
Executive Member
Posts: 1090
Joined: Wed May 04, 2011 9:35 am

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
User avatar
moda0306
Executive Member
Executive Member
Posts: 7680
Joined: Mon Oct 25, 2010 9:05 pm
Location: Minnesota

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by moda0306 » Tue Feb 28, 2012 11:05 am

Ready for a PP sh!tstorm? 

http://quote.morningstar.com/fund-filin ... ffc3b9e09c

Go to page 36 of this attachment and pay attention, under the “assets”? section to the 3rd column, on the line that says  “Investments in securities, at fair value (including securities on loan).

That FMV of the assets in the fund comes to about $3.9 Billion.

So then go down to the (a) note, and it will tell you what the iShares 20+ Year fund’s share of securities on loan is, and (wait for it)…

$1.07 Billion.  That’s right, about ¼ of the securities are on loan.  So you’re not borrowing that portion to the government… you’re borrowing them to a private leveraging operation.

How do you like that?

Then on page 39 they show the income… which is a little harder to track and securities lending income is not that high.

This is all “year ended February 28, 2011”? by the way, so things could have changed, but this at-least gives you a pretty good idea of what TLT is: A wall street machination that pays 3% interest for 30 years and holds a decent chunk of similar instruments from the US treasury.

I’ll also add that it appears that there is another counterparty involved even in collecting the treasury interest. 

At this point I'd still call i-shares, but it'll probably take forever to get to an answer
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

- Thomas Paine
alvinroast
Full Member
Full Member
Posts: 72
Joined: Mon Jan 23, 2012 11:33 pm
Location: Seattle

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by alvinroast » Tue Feb 28, 2012 12:33 pm

I'm still awaiting more info on this, but meanwhile I'm feeling pretty good about my emphasis on EDV for the bond portion of PP. 8)

At least with the gold portion I can buy coins (or bars) and bury them in the backyard, but in light of MF Global I'm really concerned about all the counterparty risk with stocks and bonds.
User avatar
dualstow
Executive Member
Executive Member
Posts: 14231
Joined: Wed Oct 27, 2010 10:18 am
Location: synagogue of Satan
Contact:

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by dualstow » Tue Feb 28, 2012 12:35 pm

I guess moda has covered it, but I wrote to iShares when I first saw this thread.
The email reply just came in:
Thanks for contacting us about iShares ETFs. The reason you are seeing these numbers is because of securities lending activities within the fund. However we will not lend securities unless it was net benefit to the shareholder.

If you have any questions regarding this inquiry, please contact us at 1-800-iShares (1-800-474-2737) Monday through Friday, 8:30 a.m. to 6:30 p.m. (EST) and we will be happy to assist you. Thank you again for contacting iShares and have a great day!
Sam Bankman-Fried sentenced to 25 years
User avatar
moda0306
Executive Member
Executive Member
Posts: 7680
Joined: Mon Oct 25, 2010 9:05 pm
Location: Minnesota

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by moda0306 » Tue Feb 28, 2012 12:44 pm

dualstow,

50% securities lending income, though?  That seems incredibly high.  I don't understand their claim about it being "to the benefit of the shareholder."

People don't invest in treasury bond funds only to have those bonds lent out out to other entities for money on the side.  Even if we did, shouldn't we have some considerably higher returns in the fund then the bonds themselves could have given us (by "considerably," I mean 1-3%?).  I'm sorry but I don't want HALF of my bonds used in some Wall Street scheme for only .5% interest at the end of the year.

Their line of thinking is beyond me, and it's starting to appear to be a lot less thinking and a lot more profiteering.  I'm not seeing the benefit come through that one would assume given a leveraging of 25% to 50% of the assets you are holding.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

- Thomas Paine
User avatar
stone
Executive Member
Executive Member
Posts: 2627
Joined: Wed Apr 20, 2011 7:43 am
Contact:

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by stone » Tue Feb 28, 2012 12:51 pm

I don't see any point at all in treasury etfs unless you live in a country where the minimum holding for the bonds is too large for your use. In the UK we can own UK treasuries in as small increments as etfs so it seems bonkers to own a UK gilt etf especially as the UK gilt etfs have 50%  :o of the securities lent out.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
User avatar
moda0306
Executive Member
Executive Member
Posts: 7680
Joined: Mon Oct 25, 2010 9:05 pm
Location: Minnesota

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by moda0306 » Tue Feb 28, 2012 12:56 pm

stone,

It'd be one thing if one could get something with one layer of Vanguardesque counterparty risk, but these Wall Street machinations seem like a joke to me.

You are LITERALLY loaning your wealth to private companies, but getting paid as if you were loaning your money to the government.

W.T.F.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

- Thomas Paine
User avatar
stone
Executive Member
Executive Member
Posts: 2627
Joined: Wed Apr 20, 2011 7:43 am
Contact:

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by stone » Tue Feb 28, 2012 1:07 pm

moda you are not just loaning to any private company, you are loaning to hedgefunds shorting treasuries. They presumably include go-for-broke "break the fed" bond vigilante types. They regularly impale themselves on their own ignorance. I wouldn't want to be depending on them for anything.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
User avatar
moda0306
Executive Member
Executive Member
Posts: 7680
Joined: Mon Oct 25, 2010 9:05 pm
Location: Minnesota

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by moda0306 » Tue Feb 28, 2012 1:13 pm

stone wrote: moda you are not just loaning to any private company, you are loaning to hedgefunds shorting treasuries. They presumably include go-for-broke "break the fed" bond vigilante types. They regularly impale themselves on their own ignorance. I wouldn't want to be depending on them for anything.
Exactly!!! 

Your goal: Own US Treasuries

In effect what your doing: Borrowing your wealth to private companies SHORTING treasuries and hope they pay you back what the treasuries would have via the terms of a contract.

I'm at a loss for words.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

- Thomas Paine
User avatar
stone
Executive Member
Executive Member
Posts: 2627
Joined: Wed Apr 20, 2011 7:43 am
Contact:

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by stone » Tue Feb 28, 2012 1:28 pm

I sometimes wonder whether it is as much about control as about actually getting income directly from the lending. The lending means that retail buying of TLT or whatever does not move the market. To move the market people have to buy bonds. Shorts get squeezed if lots of people buy bonds or stocks directly etc etc. I don't know to what extent Blackrock is connected with any major market participants anymore. Perhaps the amount invested in TLT is far too tiny to move the LTT market anyway ???
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
User avatar
dualstow
Executive Member
Executive Member
Posts: 14231
Joined: Wed Oct 27, 2010 10:18 am
Location: synagogue of Satan
Contact:

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by dualstow » Tue Feb 28, 2012 1:39 pm

moda, I have no argument with anything you wrote at the top of the page.
Over the past half year, I moved mostly out of TLT and into the real stuff, held in Fidelity.
I might have to complete that move this quarter.

But...I just set my dad up with pp that holds all its bonds in TLT.  :o It's a small pp compared to the total picture, but still.
Sam Bankman-Fried sentenced to 25 years
User avatar
stone
Executive Member
Executive Member
Posts: 2627
Joined: Wed Apr 20, 2011 7:43 am
Contact:

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by stone » Tue Feb 28, 2012 1:43 pm

dualstow, it probably still is fairly safe compared to pretty much everything else.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
User avatar
moda0306
Executive Member
Executive Member
Posts: 7680
Joined: Mon Oct 25, 2010 9:05 pm
Location: Minnesota

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by moda0306 » Tue Feb 28, 2012 1:45 pm

dualstow,

Yeah if it sounded like I was lecturing you or trying to make a point against anything you said I wasn't... just typing in frustrated confusion.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

- Thomas Paine
User avatar
dualstow
Executive Member
Executive Member
Posts: 14231
Joined: Wed Oct 27, 2010 10:18 am
Location: synagogue of Satan
Contact:

Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by dualstow » Tue Feb 28, 2012 2:04 pm

stone wrote:dualstow, it probably still is fairly safe compared to pretty much everything else.
Yeah, but now I have to decide whether or not to talk to him about it. If I don't bring it up, TLT is sure to blow up someday. I'll just tell him and wait for him to say he doesn't care. I'm sure there are a few investors here who have 100% in TLT.
moda0306 wrote: dualstow,

Yeah if it sounded like I was lecturing you or trying to make a point against anything you said I wasn't... just typing in frustrated confusion.
Oh, you didn't sound like you were lecturing. When I said "I have no argument" I could as easily have written, "I agree!"
Sam Bankman-Fried sentenced to 25 years
Post Reply