Bond funds advice needed

I was wondering if I should take some of my emergency funds from Vanguard Prime Money Market Fund and also switch some money from Vanguard TIPS Fund and put the money from both funds into Vanguard Interim Bond Index Fund.

I also own Loomis Sayles Bond Return Fund & Vanguard Short Term Index Fund.

[Lsbcal]

Currently I'm in Vanguard short term bond index and also Vanguard short term investment grade funds (VTSTX) in the ratio of 2:1. The yield spread between VTSTX and short term treasury (VFSIX) is very high, 2.4%. This is higher then at the start of the Iraq war (2.2%) and after Sept 11 atttack (1.8%). My current plan is to move fully into VTSTX (or VFSUX admiral class) as the corporate sector starts clearing up i.e. stocks move higher. Such a tactic worked out OK in 2003.

I'd stay short term until TIPS start to trade at average historic levels. The average historic real return for intermediate bonds is 2.3%, but note that now 5yr TIPS are at 0.15 percent!

Anyway that's my current strategy which will probably be good for the next 6mo to 2yrs or so. If anyone sees flaws in this approach I'd like to hear the counter arguments.

Any other opinions?

[DblDoc]

My bonds are for stable diversification. TIP's, short and intermediate term treasuries. Working like they are supposed to the last few months, not chasing performance, thats for my diversified equities.

DD

[LOL!]

Quote:

Originally Posted by Tiger Any other opinions?

I sold my VIPSX (TIPS) and bought Vanguard investment-grade short-term (VFSUX) and Vanguard GNMA (VFIIX, average duration 2-3 years). So with the intermediate bond fund in my 401(k), I'm 44% short term and 56% intermediate term nowadays. All in tax-deferred. These are my emergency fund ... I have no separate emergency fund to speak of.

[jIMOh]

I would not move an EF to a bond fund. When rates go up the bonds will drop.

I would keep cash in cash if it's an EF and not chase yield.

[Lsbcal]

While puzzling about what "EF" meant I realized that the OP was talking about emergency funds ... yikes. I agree that ER funds meant for very short term needs should not be put into investments with interest rate, credit, or other bond risks.

That said, if you have money that will not be used for a few years then it's perfectly OK to consider a bond fund matched to that duration. So for EF funds you might need tomorrow the duration is zero and stick with good money market funds.

If your duration is maybe 2 years then here is how the Vanguard short term investment grade VFSTX fund performed over a few years back when rates went low. Note the first figure is the fund's yield at the start of the year and the second figure is the fund's total return for that year:

 
2002  5.1%  5.2%
2003  3.8%  4.2%
2004  3.0%  2.1%
2005  3.3%  2.3%
2006  4.5%  5.0%

For 2003-2006 the short term treasury fund underperformed this fund.