Ipse dixit

Latin for, “Just sayin’ it don’t make it so”. (Or, as Abraham Licoln put it: “How many legs does a dog have if you call the tail a leg?”)

I had a fair amount of my ‘fixed-income’ money - essentially, living expenses to tide over when the market crunched for 6,8,10 years - in a couple of no-load, very low-fee “short-term investment-grade” funds offered by a very large US brokerage house.

One cold dark mid-February weekend I did a deep dive into what the largest of these funds – marketed as about 24% of a mixture of US govt obligations, and the rest investment-grade corporate bonds - actually owned. What maturities? Who were the guarantors?

Took awhile to dig through the layers, but a multi-hundred page semiannual SEC filing ultimately gave me what I was looking for. It was six months old, but good enough

First, the 24% US govt “short-term” obligations. This was divided into 11% US-backed securities – with maturities as far out as 2030 – plus 8% asset-backed securities, mostly mortgage & auto. The remaining 5% or so was a variety of arcane mumblemumble – like call swaps.

So, let’s set aside that only around half of the 24% was actually what a layperson like me would consider US-backed obligations…and that even that half – call it the hyper-safe tranche – had (in mid-2021) significant obligations out to 2028. (I dug around as to the industry definition of “short-term” and found there wasn’t a uniformly agreed-upon definition…but an “average” of 5 yrs or less was the most typical. Still, let me suggest that including 7-year obligations in a short-term fund is, uh, disingenuous)

But, let’s be charitable and assume that all of this 24% was indeed super-safe (even the call swaps), and would be safe from default or price collapse in the event of a substantial market shock.

What about the other 76%, the corporate “high-grade” bond holdings that comprise this rainy-day store of value?

These corporate notes were of course in a number of sectors: Communications, Industrials, Utilities, Technology, and Financial.

But when you dive down, a full 49%** of all of the money this fund has in these “high-grade corporate bonds” are in the “other” wastebasket, composed entirely of instruments that are subject to the specific footnote that they are "exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyers"
• If this was 2008, I would be thinking: tranches of mortgage-backed securities, which after a highly-questionable risk rating have themselves been chopped up, redistributed, renamed and resold multiple times to the degree that no one knows who owns what, but are obviously safe because a) they’re rated by (corrupt, Moody’s/S&P) rating houses; b) insured by an (insolvent, AIG) insurer, and c) everyone else is doing it.
• Except this isn’t 2008…so until shown otherwise, I need to regard them as corporate IOUs of undiscoverable provenance and dubious respectability, which have packaged into bundles, sold, renamed, divided, resold, repeat. And their defaults will have nowhere to go but up once the Fed changes interest rates. As Charlie Munger succinctly, memorably, appropriately put it a few years back in a very similar circumstance (his language, not mine): “If you mix raisins with tvrds, they’re still tvrds”
• In the event, “short-term" won’t help. Heck, the individual maturities of these things aren’t even listed as they’re lumped by category. (Although, eyeballing, they’ll cluster around the fund average)
• (**OK, one concession: although the raw sum of the “others” is 49%, the fine print goes on to say that as of the filing date the actual total is (12.4% net assets/76.1% bonds = ) “only” 16.3% of the bonds are opaque/unknown instruments.)

Executive summary:
• I have a very hard time buying that this “Short-term investment-grade fund” is all raisins, even though that’s how they represent it.
• In particular, I have to assume that a minimum of 12.4%, and possibly up to 40+ percent, of my capital in this fund is at risk of partial or total loss in the event of a significant market shock…or even in the event of the Fed having a more rapid increase in interest rates forced upon them by worsening inflation in the CPI
• For a portfolio as a whole, that may be acceptable. But a substantial proportion of our rainy-day money is in this fund, and at this point I became convinced that it was a reach for yield, disguised by pretty words

I asked my fee-only CFP why this conclusion was wrong? and got a, “well, we disagree” response. (Insightful, no?)

Off to plain old short-term Treasuries I went (yes, we’ve bought our I-Bonds for the year)

Anyone want to convince me that this was unreasonable paranoia?

still filing paper statements in binders, too


SEC requires funds to disclose both the average maturity and duration of a bond fund.

Here’s the Yahoo Finance page for the short-term Vanguard fund I use for 5+ years of living expenses.


You really shouldn’t be surprised by this, or have to dig through a prospectus for it.

If your CFP sold you something with less rigid reporting requirements, you probably need a new one.


1 Like

So, in the blind-pig-finds-a-truffle department:

Had I held on to the previous “short-term investment-grade fund(s)” Mar 8 - today, I would have been down a weighted 3.26%, dividends included (and, as the dividends would have been taxable, add a bit more - say, down 3.5%)

But having moved in early March to specific, dated Treasury securities - a ladder, with maturations of 4 -16 months from now - I’m nominally down 1.8%.

Except that I’m planning on keeping all (or at least almost all) until maturity, at which time(s) I will be up a guaranteed weighted ~0.4%

Plus I’m conspicuously safer against a market meltdown (past or future) than I was in March - which was the whole point of the exercise

well aware that these are nominal dollars…post-inflation, they’re all negative.
But still.

1 Like