Vanguard Bond Holdings (e.g. VBTLX) versus holding in settlement fund (e.g. VMFXX)

[mojoboy31]

So I have some bond holdings in my Vanguard Roth IRA which is some of the bond % I hold in my total portfolio to aim for a 90%/10% equities/bond ratio. The Vanguard Roth IRA bonds I hold are in VBTLX (total bond market index) currently, which shows a "30-day SEC yield as of 07/06/2023" of 4.41% and "fund average annual returns" of 1.48% (last 10 years). Not entirely sure if the yield (which is dividends it pays I believe) are in addition to the annual returns (share price increase).

I just noticed that any funds put into my Roth IRA go into the "settlement fund" which appears to be held in VMFXX (Vanguard federal money market fund). That fund shows a "30-day SEC yield as of 07/06/2023" of 5.04% and "fund average annual returns" of 0.94% (last 10 years). This appears to be much closer to the federal funds rate (even higher than my HYSA with Capital One which is at 4.15% APY).

So my questions are...

1. How much does VBTLX return on average per year? Is the math 4.41% (dividends) + 1.48% (share price increase average over last 10 years) = 5.89%/year? Or is the 1.48%/year average including the current 4.41% yield? Similarly for the VMFXX "settlement fund"... does it return 5.04% + 0.94% = 5.98%/year on average for the past 10 years? Or is the 0.94%/year (over last 10 years average) factoring in the current 5.04% rate?
2. It appears the settlement fund relies on "cash & US government securities" instead of VBTLX for example which relies on "U.S. Treasuries and mortgage-backed securities of all maturities". Vanguard describes the VMFXX fund as "one of the most conservative investment options offered by Vanguard" and it also yields more (5.04% I believe) than the bond fund currently (4.41% I believe ?). Why wouldn't one just sell any bond allocation and hold in the "settlement fund" instead of actual bonds as it returns higher than the bond fund?

 

[goldencalf]

@mojoboy31 Money market fund maintains $1.00 per share and earns interest.

The bond fund has a NAV that will move, which allows you to sell at a gain or loss, and in addition earns interest.

The reason for the longer term bond fund having a lower yield - the yield curve is inverted so short term bonds are currently yielding more than long term bonds.

 

[mojoboy31]

@goldencalf So if I'm understanding what you're saying... that means selling bond funds and holding them in the settlement fund (money market fund) will have a higher yield currently as it is only short-term holdings which currently have high rates. But that may not hold true for the future when rates go down?

 

[goldencalf]

@mojoboy31 Correct. Although yield and return are 2 different things.

If the Fed starts lowering rates, the NAV of the bond fund will rise. Which is another component of total return.

 

[mojoboy31]

@goldencalf Got it, so it sounds like in the grand scheme of things having the funds invested in a total bond fund versus having it sit in the short-term settlement fund (money market) will be similar long term (in terms of returns)?

 

[goldencalf]

@mojoboy31 There’s no way to know, unless you have a crystal ball.

Here’s what I will say, both funds are constantly buying and selling bonds. The longer term bonds are more sensitive to interest rate changes but also lock in the rate for a much longer period of time.

So in the example where the Fed lowers rates again, say down to 3%. The money market fund yield will drop pretty quick. Meanwhile the bond fund which holds its portfolio in longer duration bonds will be earning higher interest rates for a much longer time.

 

[mojoboy31]

@goldencalf Gotcha, great information!

Sounds like it isn't really worth chasing the yield between the two.

 

[dimples3130]

@mojoboy31 Not at this moment, it doesn't pay to chase yield between the 2. But when the Fed says it's done raising interest rates and begins lowering the, the natural state of affairs will return... The money market won't lose value, it will quickly reduce it's yield, while the bond fund will appreciate in value as it earns higher yields.

 

[teejay79]

@mojoboy31 Cash holdings weren’t all that long ago barely over 0 percent. That is something to keep in mind. You can back test cashx vs total bond on portfolio visualizer to see how returns historically have been.

 

[dimples3130]

@mojoboy31 First, this past year is a very different time than the past 3, 5 or 10 years. Inflation is at 4%, fed funds is over 5%, today. Versus

 

[aleshiavite]

@mojoboy31 I was trying to decide how to invest some fixed income assets and noticed too that VBTLX (bond fund) has lower 1 year, 3, year, 5 year performance than VMFXX (money market fund) . I used vanguard comparison tools to compare VBTLX and VMFXX, which has a graph feature that shows hypothetical growth of $10,000 over time. It looks like most of the time in the last 5 years, VBTLX outperforms VMFXX. However, the dramatic rise in interest rates in the past 1 year made the 1,3,5 year returns drop a lot for VBTLX compared to VMFXX.

https://imgur.com/IGNX11J

https://imgur.com/HyVGclz