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Good WSJ Article On Short Term Funds
Old 09-20-2009, 07:52 PM   #1
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Good WSJ Article On Short Term Funds

Saw this posted and I thought it was a good article by Jason Zweig @the SWJ:
Don't Trip in Search for Bond Yields - WSJ.com

I have my short term/emergency funds in a credit union account which is better than some CDs but less than what some short term bond funds are paying.
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Old 09-20-2009, 08:15 PM   #2
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Fascinating article, especially in light of our recent discussions here on the board about what to do with cash reserves. Well, and it is personally interesting since I have been thinking of moving a chunk of VMMXX over to bond funds due to the low yield in that money market fund.

Quote:
Duration generally rises in tandem with bond prices, meaning that bonds are now primed to lose even more money if interest rates go up. This is, in short, a dangerous time to chase yield.
That makes money market sound a little more attractive, despite the tiny yields.

Quote:
The riskiest bonds of all right now are Treasurys. If the economy improves and rates rise, they will get hammered. The longer the bond, the harder the hammering.

Corporate bonds also will get hurt by rising rates. But an improving economy should narrow the spread between corporate bonds and Treasurys, which will lessen your losses.

Thus, if you can't stand the pain of a money-market fund that offers no gain, your best bet is a short-term fund that has significant holdings of corporate bonds. A sensible choice: Vanguard Short-Term Investment-Grade Fund, which yields 2.8% and has a duration of 1.9. Whatever you do, do not chase yield.
Well, there's a thought. I do have some of that fund already.
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Old 09-20-2009, 09:34 PM   #3
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Yes, very interesting article. Thanks for the link. It's interesting that the Vanguard short term Investment grade Fund has a yield of 2.8% and a duration of 1.9 years while the Vanguard GNMA has a yield of 3.7% and a duration of 2.0. It would seem that a relatively large increase in yield with almost the same duration. I guess there must be additional risks to GNMA that are not apparent to the bond neophyte that I am. Well, more research...
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Old 09-20-2009, 09:40 PM   #4
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Sheesh thanks a lot. That other thread just about had me convinced to go 1/3 MM, 1/3 GNMA, and 1/3 STB. Now I've got puzzle over it another couple days.
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Old 09-20-2009, 10:50 PM   #5
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Good timing...Article reinforced my personal leanings...thus I enter an "exchange" to move from Inter Treas to St Term Inv Grade...a bit less interest sensitive with yields that are "OK"...completely defensive move that can be reversed if rates go up significantly...Tom
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Old 09-21-2009, 12:38 AM   #6
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Originally Posted by ejman View Post
Yes, very interesting article. Thanks for the link. It's interesting that the Vanguard short term Investment grade Fund has a yield of 2.8% and a duration of 1.9 years while the Vanguard GNMA has a yield of 3.7% and a duration of 2.0. It would seem that a relatively large increase in yield with almost the same duration. I guess there must be additional risks to GNMA that are not apparent to the bond neophyte that I am. Well, more research...
GNMA has funny duration risks. When rates are low, folks refinance quickly, and until recently often. That shortens duration as the old mortgage notes get paid off early. When rates go up, folks stop refinancing and sit on those low rate mortgages, which are suddenly worth a good bit less. NAV dips and duration goes longer.

I don't know if you'd see more than a 10% swing in the Vanguard GNMA funds, though. VFIIX has pretty much stayed between 9.75 and 10.75 it's whole life (at 10.73 now).
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Old 09-21-2009, 03:27 AM   #7
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Good article, thanks. Following Larry Swedroes' tips on his book on bonds, I'm mostly in Vanguard short, intermediate, and limited (between intermediate and short) funds. The article goes to show that the soudness of the book's advices hasn't changed since its last revision.
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Old 09-21-2009, 10:24 AM   #8
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We've opted to move a little to Vanguard GNMA. Most of our intermediate bond is in Wellington/Wellesley combo which is tilted toward corporates, so govt guarantee of GNMA is attractive as a step up from MM as liquid reserve. Although Vanguard Short Term IG is corporate bond I would still consider it a safe fund. Similarly, although there are supposedly some drawbacks to GNMA (negative convexity, pre-payments) Vanguard management in this area is superb. Look at the comparison of the Vanguard fund to a Gnma index on their site; i.e., they have worked to keep duration short during this period.

https://personal.vanguard.com/us/fun...T#hist=tab%3A2
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Old 09-21-2009, 10:29 AM   #9
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If long term interest rates remain stable, Ginnie Maes will be attractive. They will be less so if rates rise or fall considerably.
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Old 09-21-2009, 12:47 PM   #10
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If long term interest rates remain stable, Ginnie Maes will be attractive. They will be less so if rates rise or fall considerably.
This applies to all bonds with a duration of more than 90 days. Not even TIPS are immune to rising interest rates.

In theory if rates fall folks are supposed to pre-pay their mortgages. The reality is that anyone who could has already re-financed to a sub-5% mortgage rate --- either a few years ago or earlier this year. The only folks with higher mortgage rates are those that do not have the credit rating or home-equity to refinance. One can also look at what happened to GNMAs when rates dropped in 2003. Answer: not much happened to GNMAs.
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