Gyroscopic Investing

MachineGhost wrote: The real risk with funds then seems to be the scared money will panic when they see a -30%-50% loss on their retirement funds and since they are not holding individual bonds with a guarantee of 100% principal repaid at maturity...  well, I think they will find out the hard way that a fund in keeping a perpetual fixed duration more or less doesn't offer that guarantee.  I know I'd be FURIOUS if I lost that much on the expectation that bonds are "safer" than stocks.  Most bond funds are leveraged and are not pure Treasuries.  It's going to end in disaster.

Whether you're holding individual bonds directly or bonds in a fund (of the same average duration) any gain or loss you see in response to interest rate changes will be about the same.  If you want to "recover" the principal loss from your constant duration fund, you can sell the fund and buy a set of individual bonds with the same average duration and hold them to maturity.  If you're maintaining a constant duration ladder, the notion that it's safer to do this with individual bonds vs. owning a fund that does it is simply nonsense.

The real risk with TLT is that they loan out a hefty portion of the bonds they "own" (about 40% the last time I looked) in return for 100% cash collateral (I believe marked to market daily) which they then put in Black Rock's non-treasury backed money market fund.  There are perfect storm scenarios that are truly frightening.

rickb wrote:

MachineGhost wrote: The real risk with funds then seems to be the scared money will panic when they see a -30%-50% loss on their retirement funds and since they are not holding individual bonds with a guarantee of 100% principal repaid at maturity...  well, I think they will find out the hard way that a fund in keeping a perpetual fixed duration more or less doesn't offer that guarantee.  I know I'd be FURIOUS if I lost that much on the expectation that bonds are "safer" than stocks.  Most bond funds are leveraged and are not pure Treasuries.  It's going to end in disaster.

Whether you're holding individual bonds directly or bonds in a fund (of the same average duration) any gain or loss you see in response to interest rate changes will be about the same.  If you want to "recover" the principal loss from your constant duration fund, you can sell the fund and buy a set of individual bonds with the same average duration and hold them to maturity.  If you're maintaining a constant duration ladder, the notion that it's safer to do this with individual bonds vs. owning a fund that does it is simply nonsense.

The real risk with TLT is that they loan out a hefty portion of the bonds they "own" (about 40% the last time I looked) in return for 100% cash collateral (I believe marked to market daily) which they then put in Black Rock's non-treasury backed money market fund.  There are perfect storm scenarios that are truly frightening.

Yeah this is pretty downright infuriating.  Still boggles my mind that it's even legal to do that in a fund that touts itself as a TREASURY bond fund.

MachineGhost wrote:Aye, that is true!  Someone has to buy those bonds from the fund, eventually.

Thanks. 

Most bond funds are leveraged and are not pure Treasuries.  It's going to end in disaster.

That is certainly possible, I'm not going to say it's not!

And now people are piling back into TLT.  I guess it just goes to show its all noise.  Just stick to one passive portfolio allocation and ignore all the hype.

"Without the Federal Reserve pulling the trigger on an interest rate hike, overseas fixed-income investors have piled into more attractive U.S. government debt, bolstering U.S. Treasury bonds and related exchange traded funds"

http://www.etftrends.com/2015/08/foreig ... bond-etfs/

rickb wrote:
The real risk with TLT is that they loan out a hefty portion of the bonds they "own" (about 40% the last time I looked) in return for 100% cash collateral (I believe marked to market daily) which they then put in Black Rock's non-treasury backed money market fund.  There are perfect storm scenarios that are truly frightening.

Do you know if EDV does this as well?

AdamA wrote:

rickb wrote:
The real risk with TLT is that they loan out a hefty portion of the bonds they "own" (about 40% the last time I looked) in return for 100% cash collateral (I believe marked to market daily) which they then put in Black Rock's non-treasury backed money market fund.  There are perfect storm scenarios that are truly frightening.

Do you know if EDV does this as well?

Per their statement of additional information (https://personal.vanguard.com/pub/Pdf/s ... 2210103471), securities lending is limited by the Investment Company Act of 1940 to 33.3% of any fund's assets in return for cash (marked to market daily), and they go on to say they do (or would?) invest in this cash in Vanguard CMT Funds (non-treasury backed MM listed in their annual and semiannual reports as "Vanguard Market Liquidity Fund").

In their latest semiannual report (https://personal.vanguard.com/funds/rep ... 2210099529) they show about $500K in this MM, out of their total assets of about $1.3B.  There's nothing in this report specifically about any assets they've loaned (which I think there would be if they're doing this), although I'd expect that at least any cash in return for loaned assets would show up as invested in this MM. 

So at least at first glance, it looks like they're not loaning out anything.  If you're seriously interested in this, you might give them a call.