Short term bonds in taxable other than munis

[MrLoco]

Here is my situation. I currently have a large position in an intermediate muni bond fund in my taxable account which I plan to keep forever. The monthly dividends are swept into my bank account. Even if interest rates rise, I plan to keep this fund indefinitely so no worries.

I have a mutual money market account which is my "dry powder." I use this fund to rebalance my AA when necessary and look for dips in the market to reload those equity funds that have sagged. I would like to exchange most of this MM fund for either a short term corporate bond fund or a short term treasury/govt. bond fund. I could get a yield of about 1 - 1.5% on the govt fund and 2.0% on the corporate bond fund. Since the average duration in both funds is 2.5 years ......any rise in interest rates should not drop the NAV by too much.

I would still keep some money in the money market account. Just not as much. Not interested in a CD ladder as this lacks immediate liquidity. Plus do not want to set up more funds/investments. Also, I know I could just add a short term muni fund as this is tax efficient in taxable, but then my exposure is too heavily weighted to munis. In my IRA I currently have a bond fund which is 70%/30% Govt/corporate bonds. So maybe a little more corporate bond exposure is appropriate in taxable?

So what to do? Go with the ST corporate fund or the govt. bond fund? If I go with a treasury fund, I believe. the dividends are free from state income tax. Any alternatives to keep my dry powder account relatively stable yet squeeze a little more yield over the money market fund?

 

[Islandtraveler]

I have been using Vanguard Short-Term Investment-Grade Fund VFSUX as my cash proxy. It is a low volatility short term bond fund that pays 2.1%. The Admiral shares have a 10 bp expense ratio but require a minimum of 50k. I call it my money market on steroids. I’m not sure about the taxable treatment of the dividends. I think it is taxed at ordinary income rate. I agree with you. We all need to squeeze a few more shekels out of a low yield environment without undue risk.

 

[pb4uski]

.... Any alternatives to keep my dry powder account relatively stable yet squeeze a little more yield over the money market fund?

Yes, I use an online savings account... immediate liquidity, no interest rate risk and no credit risk if you keep under the FDIC limits and they pay 0.9 to 1.2%... easy to set up and use but is another account.

Another viable alternative might be a short term corporate bond fund or short term corporate target maturity bond fund. BSCH is yielding 0.93% to maturity in 2017 based on current price according to its website.