bill o wrote:
Be careful...don't get returns and yields mixed up. The 1 year return has been 3.42% and since inception is 3.89%. The actual yield (interest paid to you) is only 0.76%. The reason the return has been so good is because this fund is 70% US Treasuries which are in the middle of a major bubble (records highs). If and when interest rates begin to rise the return will be negative.
True. But the duration let's you quantify "the return will be negative." The OP has earned 3.42% the past year. If rates went up tomorrow by a full percent then about 2.7% of that would theoretically evaporate and the net return would be about 0.72%. If we were talking about as much as $10000, the difference between that at a guaranteed 0.84% would be 0.12% or about $12/year. It is hardly worth worrying about, especially since the probability of the probability of rates going up a full percent in the next couple of years is almost negligible. The Fed has fairly good control over short rates and has pledged low rates through 2014. I suspect the smart managers at Vanguard have pushed the duration on this fund out to the high end to take advantage of slightly better yields and a further increase in price in response to Operation Twist. Even though that action has left the headlines, it is still very much happening.
bill o wrote:
Right now, I'd choose 0.84% in a bank account over 0.76% in a bond fund that has the potential to lose money when interest rates rise. I wouldn't necessarily sell out of the fund, I just wouldn't commit any new short term money to it.
@Bill, I think your points are valid, but I also think that a little situational awareness right now suggests that a short term bond fund is a very safe place and offers much better potential upside than a bank account without much corresponding risk.