An Alphabet Soup of Yields

When someone says their word is their bond, it means you can count on them. In similar fashion, investors expect to be able to depend on reported data for their bond investments.

And with higher interest rates dominating headlines, many investors are more curious to know how the yield—how much income an investment produces—on their cash, money funds, and bond investments has changed in recent months.

To be clear, this isn’t a post about the role of bonds in a portfolio. And it’s not intended to explain how rising interest rates may impact bond returns going forward.

My goal is to simply acknowledge that many websites report multiple (and different) yields for the same bond fund, and to help explain the differences and simplify the confusion.

Consider Vanguard’s Total Bond Market Index Fund (VBTLX), the largest bond fund in the United States and a good proxy for the performance of the U.S bond market:

• On Thursday, February 23, Charles Schwab’s retail investor website reported a 30-day SEC Yield of 3.89% and a distribution yield of 2.39%.
• Vanguard’s own investor site reported a 30-day SEC Yield of 4.17% and distribution yield of 2.81%.
• Popular financial advisor website YCharts reported a 30-day SEC yield of 4.14% and distribution yield of 2.65%, while also providing a “Current Yield” of 2.95% and a “Yield to Maturity” of 4.62%

That’s three websites, four yield measures, and eight different reported figures, ranging from 2.39% to 4.62%.

So, which is it?

A Primer On Yields

While some of the discrepancies above are due to the different reporting dates, a few definitions may help explain the differences in these various yield measures:

Current Yield: The current yield for an individual bond is the annual coupon (interest income) paid by a bond, divided by the current price. For a bond fund, the current yield is the weighted average current yield of each bond held in the fund.

Current Yield = 12 Months’ Interest Income / Current Price

Distribution Yield: The distribution yield measures all distributions paid by a fund over the previous twelve months, divided by price. This includes coupon income plus any gains or return of capital and, thus, applies to bond funds and not to individual bonds.

Distribution Yield = Previous 12 Months’ Fund Distributions / Price*

*Why “price” and not “current price” for distribution yield? Because some sources use current price, while others (like Vanguard) use the average price of the fund over the past month. Thus, why reported distribution prices for the same fund on the same day can differ.

While current yields and distribution yields accurately reflect a bond fund’s past distributions, those measures may not best reflect what a fund might yield in the future. Two forward-looking measures are:

Yield to Maturity (YTM):  YTM is the expected return of a bond assuming it is held to maturity and all interest payments are reinvested at the same rate. Given these assumptions cannot be known in advance, this is a theoretical yield measurement of a bond’s expected return, not its actual return. A bond fund’s YTM is the weighted average of the YTM for each bond held in the fund.

30-Day SEC Yield: The 30-Day SEC yield takes accounting information from the past 30 days and reflects it as an annualized figure to estimate the total return of a bond fund over the average maturity of the fund’s holdings.

Tying It Together

So which measure is better? The answer depends on what you’re using it for.

Estimating future performance: If you’re looking to estimate what a bond fund might return in the future, its 30-Day SEC yield is a good measure. As it reflects information from the past 30 days, the SEC Yield will quickly reflect fluctuations in interest rates, providing a new snapshot of returns.

If seeking to compare the SEC yield of two different funds, however, keep in mind the risk exposure of each fund may differ—and a higher yield may indicate higher risk.

Determining what you were paid: If you instead want to know the amount of cash a bond fund has generated, the Distribution Yield is the best measure.

Determining what you will be paid: During a period of stable interest rates, Distribution Yield is also a good measure of the cash likely to be distributed. It will understate the amount of cash a fund produces during rising rates and overstate the amount during declining rates.

The Bottom Line

Taking it back full circle, the 30-Day SEC Yield of the Vanguard Total Bond Market Index Fund as reported by Vanguard for February 21, 2022 was 4.17%. While future performance for any investment is highly uncertain, that’s as good an estimate as any of what the fund might return over the next 12 months.

Vanguard’s reported distribution yield for the fund is 2.81%. That, too, is an accurate reflection of the cash generated by the fund, but likely understates what is expected to be received going forward given recent changes in interest rates.

Regardless of the measure, today’s bond fund yields are generally higher than they were a year ago, reflecting both the lower prices of existing bonds and the higher coupon payments of newly acquired bonds.

And as starting bond yields have historically been a reliable indicator of future returns, today’s higher yields should be interpreted as a relative measure of good news.