What are good bond funds?

DVDend · Post by **DVDend** » Mon Feb 21, 2011 8:40 pm

What are good bond funds/ETF to invest in? I have invested mostly in dividend stocks but they are getting too expensive for my taste and I need to find a place to park the cash. Probably something that invest in short term bonds as interest rates and inflation is likely to go up.

Post by **jacob** » Mon Feb 21, 2011 8:52 pm

Personally, I'm just going with an indexer for bonds, BND. That is where I store the majority of my nonstocks.
Note that BND has a duration of ~5 years (it'll decline 5% if interest rates rise 1%) which may be more risk than you want.
The next step would be 12 or 3 month treasuries which I would buy from treasurydirect.

Robert Muir · Post by **Robert Muir** » Mon Feb 21, 2011 8:54 pm

I use Vanguard's VFSTX (Short-Term Investment-Grade) fund. That said, interest rates pretty much have nowhere to go but up, so unless you're planning on keeping the money in there more than a year, then I would recommend keeping it in a cash money market. Even though the money market isn't paying anything, at least your principal won't go down when the interest rates go up.

DVDend · Post by **DVDend** » Mon Feb 21, 2011 9:12 pm

Thanks for the replies! The treasurydirect looks really convinient but probably will not work with IRA/401k? Anyway, the 12 month tressury rate seems to be 0.3%. Currently, I can get better even with my online savings account (~1$%). I guess now is a really bad time to get fixed income yield AND protection of principal...

George the original one · Mon Feb 21, 2011 9:49 pm

I use two bond funds FAX & VKQ... can't really say that either one is good since rates are likely to go up soon.
FAX is really a hedge against the declining dollar and a bet that SE Asia & Australia will do well. For value, it tracks the Australian dollar pretty well and currently yields 6.2%. Yes, you will pay foreign tax with it, but it's a small amount and the yield often includes return of capital. I buy more whenever the yield goes above 6.5%.
VKQ is a 30-40% leveraged municipal bond fund and thus generates tax free earnings in the USA, therefore not really a suitable vehicle in an IRA/Roth. Muncipal bonds have an increased risk these days as you've undoubtedly heard, but this one compensates you by yielding 7.8%. Try not to buy when it is trading at a premium to NAV (which is difficult unless bond values are falling like they did in the fall). Do your own due diligence on their holdings before investing.
Do not confuse bonds with bond funds. Bond funds will trade the bonds regardless of what the claimed holding period is and they do eat into the profits with their management.

Chris · Post by **Chris** » Mon Feb 21, 2011 11:21 pm

> treasurydirect looks really convinient but probably will not work with IRA/401k?
Part of the reason for treasuries' lower rates (compared to other bonds) is due do exemption from state income tax. If you are choosing allocations between tax-deferred and taxable accounts, you may want to take this into consideration.

44deagle · Post by **44deagle** » Tue Feb 22, 2011 1:51 am

hyg, lqd

DividendGuy · Post by **DividendGuy** » Tue Feb 22, 2011 2:59 am

I'm keeping spare cash in a money market. Rising interest rates seem to be just around the corner and I'd like to not lose money. When the rates start to rise I'll test the waters a bit.

44deagle · Post by **44deagle** » Tue Feb 22, 2011 6:07 am

I'm also keeping about half of my money in a money market. From what I have read, we seem to be going through a period similar to the last gold/silver bull market. It ended with interest rates up around 20%.

dot_com_vet · Post by **dot_com_vet** » Tue Feb 22, 2011 6:18 am

Vanguard has great bond funds.
As others have said, now is not a good buying opportunity. I wouldn't invest unless you completely understand how bond funds work. Especially interest rate changes and NAV.

Post by **jacob** » Tue Feb 22, 2011 6:20 am

With the housing market as it is, do you think anyone, especially Bernanke, has the guts to increase the going rate to 20%?

44deagle · Post by **44deagle** » Tue Feb 22, 2011 12:53 pm

no, but if it comes down to saving the dollar he will.

DVDend · Post by **DVDend** » Wed Feb 23, 2011 7:05 pm

Thanks all for replies - I learned a lot more than I expected. I think I will hold on to the cash for now although I have to say that VKQ does look interesting (thanks George TOO)!