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Bond fund question
Old 11-20-2008, 07:56 AM   #1
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Bond fund question

Vanguard has a GNMA fund and a Short Term Bond Fund. Risk for GNMA is shown on scale as "2". Risk for Short Term Bond Fund is shown as "1".
Short Term Bond Fund holds corporate debt some of which is "b" rated. GNMA is all AAA back by the government. Short Term Bond Fund is yielding much higher than GNMA. Is the higher risk rating for GNMA simply a result of longer durations? Which fund offers lowest risk to my principal?

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Old 11-21-2008, 10:41 PM   #2
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This seems to be a difference in rating criteria. S&P or Moody's rate the GNMA fund AAA, which means extremely low likelihood of default. The "B" rated corporate debt means higher likelihood of default. S&P and Moody's assign their ratings based on their evaluation of the issuers ability to pay.

You didn't mention who assigned the "1" or "2" ratings (Vanguard?). My guess is this is likely based on different criteria than what S&P and Moody's would use, perhaps past performance of the fund, volatility, and other criteria similar to what Morningstar would use. It's worth reading the fine print on what the ratings are based on, but this seems to be a difference between:
1. rating the funds and their performance and volatility, versus
2. rating the issuers of the bonds and their ability to repay

Again, I would dive into the details before investing, but there is probably a tradeoff like: the GNMA has less likelihood of default loss, but the Short-term bond fund has less likelihood of volatile downward movements.

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Old 11-22-2008, 12:19 AM   #3
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The Vanguard GNMA fund, in DW and my IRA's, has been a nice performer this past year. I like it a lot. Of course, anything in my portfolio that isn't laying on its back with its legs sticking up looks good to me right now!
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