After reading several posts, and videos, I've started learning about Bonds, and Bond ETF's.
Here is my attempt at understanding the relationship between Inflation, and past/future returns of various duration bond funds.
Plotting the recent inflation rate (red), it's easy to see the Fed's response(black) to the pandemic mid-2020, then rates rising since 2022 to control inflation:
![Image]()
The VUSXX Treasury MMF(lt blue) has a short duration of 30days, and it's dividend yield closely follows the Fed rate with a short lag (1month?) ..
![Image]()
Fairly straightforward so far...
Adding VGSH Short Term treasury (brown), with a duration of 1.9 years gets a little more interesting. It appears to have the same response, but with a longer 'lag' (it looks like about 9 months). I assume it takes 8-10 months for the 'old' bonds within the fund to mature, replaced with newer, higher yielding bonds.
![Image]()
Adding some Intermediate Term Bond ETF's, VGIT (duration = 5 years, and BND (duration = 6 years), one could extrapolate the 5year duration (red) overtaking the 6year duration BND(green). Would this complete the yield inversion that started in 2022, with VUSXX(30d) earning the highest, followed by VGSH(1.9y), VGIT(5y), and BND(6y)?
![Image]()
Do I have it right so far?
Here's where I get real fuzzy. ... Since Inflation is currently at 3.00%, and FOMC dot plot suggests a 2.25% drop over the next 2 years to 3.1%, is it possible to roughly extrapolate the total returns going forward?
Questions I still have:
1. I read somewhere that "if a bond has a duration of 2 years, its price would rise about 2% when interest rates rose 1 percentage point".
If Interest rates fell by 2%, would the price of VGSH rise by 3.8% (2 * duration of 1.9years)?
Also would VGIT rise 10%, and BND rise by 12%?
2. Rob Berger mentioned in his video that you can predict rough estimate of how many years, bond will pay sec yield by using the formula:
(bond duration times 2) minus 1..
Does that mean VGSH will roughly earn the SEC yield of 4.7% for the next 2.8 years?
VGIT will roughly earn the SEC yield of 4.26% for the next 9 years?
BND will roughly earn the SEC yield of 4.53% for the next 11 years?
3. It seems inevitable that yield curve will un-invert in the near future. Is it possible to predict how long after that dividend yields will take to un-invert?
Sorry for the newbie questions, I'm trying understand how bond ETFs compare to similar duration CD's.
Here is my attempt at understanding the relationship between Inflation, and past/future returns of various duration bond funds.
Plotting the recent inflation rate (red), it's easy to see the Fed's response(black) to the pandemic mid-2020, then rates rising since 2022 to control inflation:
The VUSXX Treasury MMF(lt blue) has a short duration of 30days, and it's dividend yield closely follows the Fed rate with a short lag (1month?) ..
Fairly straightforward so far...
Adding VGSH Short Term treasury (brown), with a duration of 1.9 years gets a little more interesting. It appears to have the same response, but with a longer 'lag' (it looks like about 9 months). I assume it takes 8-10 months for the 'old' bonds within the fund to mature, replaced with newer, higher yielding bonds.
Adding some Intermediate Term Bond ETF's, VGIT (duration = 5 years, and BND (duration = 6 years), one could extrapolate the 5year duration (red) overtaking the 6year duration BND(green). Would this complete the yield inversion that started in 2022, with VUSXX(30d) earning the highest, followed by VGSH(1.9y), VGIT(5y), and BND(6y)?
Do I have it right so far?
Here's where I get real fuzzy. ... Since Inflation is currently at 3.00%, and FOMC dot plot suggests a 2.25% drop over the next 2 years to 3.1%, is it possible to roughly extrapolate the total returns going forward?
Questions I still have:
1. I read somewhere that "if a bond has a duration of 2 years, its price would rise about 2% when interest rates rose 1 percentage point".
If Interest rates fell by 2%, would the price of VGSH rise by 3.8% (2 * duration of 1.9years)?
Also would VGIT rise 10%, and BND rise by 12%?
2. Rob Berger mentioned in his video that you can predict rough estimate of how many years, bond will pay sec yield by using the formula:
(bond duration times 2) minus 1..
Does that mean VGSH will roughly earn the SEC yield of 4.7% for the next 2.8 years?
VGIT will roughly earn the SEC yield of 4.26% for the next 9 years?
BND will roughly earn the SEC yield of 4.53% for the next 11 years?
3. It seems inevitable that yield curve will un-invert in the near future. Is it possible to predict how long after that dividend yields will take to un-invert?
Sorry for the newbie questions, I'm trying understand how bond ETFs compare to similar duration CD's.
Statistics: Posted by AnothERetire — Tue Jul 23, 2024 11:12 pm — Replies 1 — Views 182