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We have discussed this before in the context of JNK ( Which the ETF equivalent of Junk Bonds) ie NON-Investment Grade High Yield Bonds - obviously Corporate.

Just for the sake of visual a chart from Yahoo!

Obviously the highest volatility will be in the High Yield ( Junk) variety - where the propensity of default is Highest. But if you compare the Corporate-Investment Grade ( ie much lower risk of default) - its a good lesson. Pessimism hit rock bottom in Nov, but as far as the bond market goes it is holding - however they are also coming down with the market.

TMFJake started the panickometer with the TED spread ( which is basically the short end of the curve - difference between corporate and treasury) - but if you wanted to understand the same picture in terms of bonds - here it is at the EXTREME end ( Long Term bonds)

Just look at the Treasuries shooting off!

My thesis
The obvious: Too high risk of default priced in ( for JNK and High Yields)....blah...blah ...blah. The problem is THERE IS A POSSIBILITY of 20% of companies coming to brink of default! Thus JNK was possibly a screaming buy on Nov 20th -but now who knows. Also currently these are posing around 10% yield ( I think JNK is 9.82) - and on a TAXABLE account ( That's the crux of the pitch here, possibly) may not be worth the extra risk.

So the better brethren in the chart ( with much lesser variability) were the INVESTMENT grade corporate bonds.

Whether you do the ETFs or the Vanguard is upto you - see most of my cash is in my Taxable Vanguard account ( while in the non-taxable ie my 401K - where also its about 90% cash, I dont have this choice - I will simply have to do the broader Bond index)

My feeling is the things to keep in mind

(a) Another semi-crash with another round of flight to treasury - VERY VERY important thing to watch , did not happen this time (ARE WE CLOSE TO A BOTTOM?). This would be the window of opportunity -because prices will be possibly 5-7% cheaper

(b) Interest rate sensitivity: Remember the reason why the YIELD SPREAD is high is because of fear....if rates start creeping up ( Which it inevitably will, if the economy finds some footing) - the Long Term Bonds are going to suffer. Hence I prefer a duration hedge ( VFICX) which is the Intermediate Term Corporate Bond. Yield difference is laughable - 5.82 for Intermediate and 6.3 for Long Term. Which makes a strong case for Intermediate ( As should be obvious I am making a case for deploying a major portion of parked cash for 2009 to early 2010) - for 1/2 percent why take on that risk.

Strangely I like the holding of the Longer fund a little better. The intermediate is full of companies in finance ( obviously they are usually not into long term funding) with Govt backing. Citi,BAC,JPM,GE.( Which of course makes the bonds almost as safe as Treasury) While the longer term has Tech, Healthcare etc.

Let me know what you guys think! Essentially this is a "weather it with your head down" pitch. You can get about 6% Pre-Tax yield without I think too much risk and downside volatility ( if the BOND bottom holds - lets say we wait out March and S&P does a new bottom) - <10%.

So good chance of getting back entire principal in 1 year ( THIS IS THE PROBLEM - I cant see holding these longer duration - because of the intrinsic interest rate risk - which will push the price lower) with a 5%+ return!

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