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Request for additional input- Zero Coupon Bonds/Funds
Mike M asked a question re BTTRX on this post and we would appreciate any additional input available regarding whether it is too late to take advantage of this situation. Thanks- OJ
Hey OJ. Not sure what you're looking for re imput. Think of these as kinda like a rocket sled on rails. The farther out the maturity the higher the octane. While the end payoff is known, in between they'll shoot up when rates drop, and tumble when rates rise. This pretty much on a day to day basis.
BTTRX replicates "stripped" T-Bonds with a maturity of 2025 - which is getting out there a bit. AC offers these in a range of maturities. "Stripping" means they don't pay interest - at least in the usual sense. (it's been stripped and embedded in the bond's payoff value at the date of maturity). This makes em even more volatile on both the up and down side than you'd think for any given maturity. Their appeal is that IF you can hang on as they gyrate over their maturity span (in this case about 14 years), you get the guaranteed value at end, which I believe to be $100 per share. Since ya bought em cheaper, ya made some money. Caveat: Since the fund essentially reaches maturity ($100) on December 31, 2025, your payout will be in 2026 dollars. Anybody's guess what that will buy you than. As you can see, returns appear phenomenal in recent years as rates have plunged. This is primarily a function of dropping rates. Expect some #*%@*# bad years if rates turn abruptly up.
IMHO they're not a good long term investment with interest rates so low. Think you'll do better in a good balanced fund (like OAKBX) over that time. Having said that, they are still good trading vehicles if you're so inclined. I think bee has owned these in the past and has done very well. Not aware of Catch owning them, but might. I owned some maybe 10 years ago. Did OK, but didn't like the volatility. American Century been selling these many years and if you google "zero coupon bonds" or "stripped treasuries" you're likely to come across plenty of reading. Regards, hank
This note is also posted to the other recent "zero coupon" post.
The various replies in this thread pretty much cover the facts about "zeros"; a bond that has value at maturity in "x" amount of time, but that does not pay a current or ongoing yield via a distribution, in the case of a bond fund.
Many of we older folks may have already been involved in "zeros" as a gift to another or gifted to us when we were much younger..........being the good, old plain jane savings bond that could be purchased at a bank or CU. The EE series type is a bond that pays no current yield, is purchased at a discount to face value when it fully matures in the future. This also applies to today's T-bills with a duration of 1 year or less. If one buys such a fund, the value comes from the rotation of the older bills reaching maturity (full value) and constantly being replaced with newer issued T-bills.
This chart compares a few long duration Treasury bonds type funds/indexes. BTTRX does not vary much from TLT or FLBIX. Two things about the chart: you may hover the pc mouse at any point on chart line for a particular fund to find it price on a partiuclar date. Also, just below the bottom of the chart, you will find a "slider" for a time line that is currently set at its default of 200 days. You may slide this to the left for a much longer time frame. When doing this you may view a few particular price moves, especially the up moves and note a few days. Upward price changes in and around April/May of 2010 and 2011, and the price move in July, 2011. The first two involved ongoing problems with Greece and the EuroZone. The July/Aug 2011 involved the announcment of the quality downgrade of U.S. debt. Among all of the various upward moves of these funds are a number of announcments from the Fed. Reserve that it would be buying bonds to support their programs. I suspect this support is still in place to hold down longer term rates in the hopes of maintaining low mortgage rates to help stimulate this sector; as it is a known "sick" area of the economy and continues to be a big drag. Recent Fed announcments indicate a similar support/buying program in the mortgage securities area. I am watching this area to determine moves.
Anyhoo..........I hope looking at the chart helps you see a bit more. Is all of the big fun gone from the long bond area? Perhaps most of it is gone; but traders know there are still many underlying problems, and any baby black swans may continue to allow for "some" positive movement in this area of safe havens.
Morning Catch: It's important to note that the funds you have chosen to compare with BTTRX have a much longer "average weighted maturity" than does the former. BTTRX (American Century Zero Coupon 2025 Fund)) currently has a maturity of just over 14 years. At that point the shares will have achieved their anticipated $100 NAV and the fund will be liquidated. Your first example, TLT (Barclay's 20+ Year T Bond I-Shares) has an average weighted maturity of about 28 years. while the second example, FLBIX (Fidelity Spartan Long Term Treasury Fund) has a weighted average maturity of around 24 years.
Yes, the sensitivity to interest rates (as measured by "duration") is similar for all three as you suggest. However my point is/was that for any given maturity these fluctuations are much greater with the zero type instrument. Simply put - with the zero you're purchasing what looks like a 14 year bond, but which has the interest rate risk of a 24-28 year bond. And that risk, as you know, is much higher than it would otherwise be for a (hypothetical) 14 year Treasury bond.
Links to TLT & FLBIX maturity and duration measures
You are correct. This is just a broad look at the area related in the original post.
Not unlike other investment sectors, one has to look and guage what a fund or index really may consist or contain. Many bond funds listed as investment grade or TIPs as examples have many variables inside for holdings, as of the most recent prospectus. Various TIPs funds use a mix of duration of these bonds; and one may find a fairly large range of YTD results. Many of the investment grade bond funds for their YTD's returns this year did not get the strength from corp. holdings, but from TIPs and other Treasury holdings.
Your note regarding this bond area should be of benefit for those reading through this.
Comments
BTTRX replicates "stripped" T-Bonds with a maturity of 2025 - which is getting out there a bit. AC offers these in a range of maturities. "Stripping" means they don't pay interest - at least in the usual sense. (it's been stripped and embedded in the bond's payoff value at the date of maturity). This makes em even more volatile on both the up and down side than you'd think for any given maturity. Their appeal is that IF you can hang on as they gyrate over their maturity span (in this case about 14 years), you get the guaranteed value at end, which I believe to be $100 per share. Since ya bought em cheaper, ya made some money. Caveat: Since the fund essentially reaches maturity ($100) on December 31, 2025, your payout will be in 2026 dollars. Anybody's guess what that will buy you than. As you can see, returns appear phenomenal in recent years as rates have plunged. This is primarily a function of dropping rates. Expect some #*%@*# bad years if rates turn abruptly up.
IMHO they're not a good long term investment with interest rates so low. Think you'll do better in a good balanced fund (like OAKBX) over that time. Having said that, they are still good trading vehicles if you're so inclined. I think bee has owned these in the past and has done very well. Not aware of Catch owning them, but might. I owned some maybe 10 years ago. Did OK, but didn't like the volatility. American Century been selling these many years and if you google "zero coupon bonds" or "stripped treasuries" you're likely to come across plenty of reading. Regards, hank
This note is also posted to the other recent "zero coupon" post.
The various replies in this thread pretty much cover the facts about "zeros"; a bond that has value at maturity in "x" amount of time, but that does not pay a current or ongoing yield via a distribution, in the case of a bond fund.
Many of we older folks may have already been involved in "zeros" as a gift to another or gifted to us when we were much younger..........being the good, old plain jane savings bond that could be purchased at a bank or CU. The EE series type is a bond that pays no current yield, is purchased at a discount to face value when it fully matures in the future. This also applies to today's T-bills with a duration of 1 year or less. If one buys such a fund, the value comes from the rotation of the older bills reaching maturity (full value) and constantly being replaced with newer issued T-bills.
This chart compares a few long duration Treasury bonds type funds/indexes.
BTTRX does not vary much from TLT or FLBIX.
Two things about the chart: you may hover the pc mouse at any point on chart line for a particular fund to find it price on a partiuclar date. Also, just below the bottom of the chart, you will find a "slider" for a time line that is currently set at its default of 200 days. You may slide this to the left for a much longer time frame. When doing this you may view a few particular price moves, especially the up moves and note a few days. Upward price changes in and around April/May of 2010 and 2011, and the price move in July, 2011. The first two involved ongoing problems with Greece and the EuroZone. The July/Aug 2011 involved the announcment of the quality downgrade of U.S. debt. Among all of the various upward moves of these funds are a number of announcments from the Fed. Reserve that it would be buying bonds to support their programs. I suspect this support is still in place to hold down longer term rates in the hopes of maintaining low mortgage rates to help stimulate this sector; as it is a known "sick" area of the economy and continues to be a big drag.
Recent Fed announcments indicate a similar support/buying program in the mortgage securities area. I am watching this area to determine moves.
Anyhoo..........I hope looking at the chart helps you see a bit more. Is all of the big fun gone from the long bond area? Perhaps most of it is gone; but traders know there are still many underlying problems, and any baby black swans may continue to allow for "some" positive movement in this area of safe havens.
http://stockcharts.com/freecharts/perf.html?BTTRX,FLBIX,TLT,EDV
Take care,
Catch
Morning Catch: It's important to note that the funds you have chosen to compare with BTTRX have a much longer "average weighted maturity" than does the former. BTTRX (American Century Zero Coupon 2025 Fund)) currently has a maturity of just over 14 years. At that point the shares will have achieved their anticipated $100 NAV and the fund will be liquidated. Your first example, TLT (Barclay's 20+ Year T Bond I-Shares) has an average weighted maturity of about 28 years. while the second example, FLBIX (Fidelity Spartan Long Term Treasury Fund) has a weighted average maturity of around 24 years.
Yes, the sensitivity to interest rates (as measured by "duration") is similar for all three as you suggest. However my point is/was that for any given maturity these fluctuations are much greater with the zero type instrument. Simply put - with the zero you're purchasing what looks like a 14 year bond, but which has the interest rate risk of a 24-28 year bond. And that risk, as you know, is much higher than it would otherwise be for a (hypothetical) 14 year Treasury bond.
Links to TLT & FLBIX maturity and duration measures
http://us.ishares.com/product_info/fund/overview/TLT.htm
http://fundresearch.fidelity.com/mutual-funds/performance-and-risk/315911818
You are correct. This is just a broad look at the area related in the original post.
Not unlike other investment sectors, one has to look and guage what a fund or index really may consist or contain.
Many bond funds listed as investment grade or TIPs as examples have many variables inside for holdings, as of the most recent prospectus. Various TIPs funds use a mix of duration of these bonds; and one may find a fairly large range of YTD results. Many of the investment grade bond funds for their YTD's returns this year did not get the strength from corp. holdings, but from TIPs and other Treasury holdings.
Your note regarding this bond area should be of benefit for those reading through this.
Take care,
Catch