Crawling Road

EyeDee over at the Bogleheads forum posts the following:

Those who own Vanguard Treasury funds to avoid mortgage-backed securities should probably be aware that as of 08/31/2011, Government Mortgage-Backed securities in Vanguard’s Treasury funds are up to:

17.7% in Short-Term Treasury Fund
17.4% in Intermediate-Term Treasury Fund
16.9% in Long-Term Treasury Fund

These links go over the current composition of these funds:

https://personal.vanguard.com/us/funds/snapshot?FundId=0032&FundIntExt=INT#hist=tab%3A2
https://personal.vanguard.com/us/funds/snapshot?FundId=0035&FundIntExt=INT#hist=tab%3A2
https://personal.vanguard.com/us/funds/snapshot?FundId=0083&FundIntExt=INT#hist=tab%3A2

I went over why I don’t like Vanguard’s Treasury Bond Funds in a previous post on holding cash. Sometimes you just can’t help but use them depending on your situation, but given the choice I recommend avoiding Vanguard’s Treasury Funds.

Now, allow me to vent for a bit.

Vanguard bond managers are adding absolutely no benefit to investors by shifting around 20% of the assets in these funds to what they think adds more value. And if you look at the Total Bond Fund fiasco in 2002, even Vanguard managers can and do make mistakes. They are chasing yield, and chasing yield can cause problems.

I had posted before that running a Treasury bond fund should be the simplest job in the world for Vanguard and they are trying to make it difficult. If I ran the fund I would require a computer and a PlayStation 3.

The computer is to balance the deposits and redemptions each morning and close of business with buys/sells of Treasury bonds.

The PS3 is for the other seven hours a day where I would have absolutely nothing to do.

I don’t understand why they feel like they need to run their Treasury funds with a speculative bent. I recommend you just buy bonds directly and sit them in your brokerage account or at Treasury Direct. This costs you nothing each year in management fees and they just sit there quietly and pay you interest twice a year.

If you can’t do the above, then use the iShares products (Tickers: TLT, SHY, SHV) that are essentially 100% Treasuries and have a prospectus that limits better what they can do behind the scenes.

Vanguard putting mortgage bonds in a Treasury bond fund is completely inappropriate. Mortgages behave much differently than nominal bonds in changing interest rate environments. Why? Well, people refinance mortgages when interest rates are falling for instance but tend to hold onto low interest loans when rates rise. So it’s heads they win tails you lose. Mortgages have no business being in a Treasury bond fund and I recommend avoiding Vanguard Treasury Bond funds if you are able.