No. of Recommendations: 2
Another question: my 401k offers the following choices in bond: Vangard Short Term Bond, Vanguard Totol Bond, Pimco Total Return PTTRX. What is your recommendation among these choice in the current interest environment

It sounds like you are one of those people who are stuck with only bond funds or money market (and stock funds) in your 401 k. Look at the FAQs on bond funds for a more complete discussion.

Pimco is an actively managed fund, so whether they can outsmart the market depends on whether they can outsmart the market.

For the Vanguard funds, we can do some cold calculations about what will happen if relevant interest rates rise, although there are other factors that are harder to project (how refinancing of mortgages affects to Total Bond Market Fund—historically about 1% point loss to NAV per year—whether a rise in interest rates is associated with an improving economy so corporate bond values increase, compensating for falling NAV).

Currently the Money Market is at about .5%. If interest rates go up, that should rise over a 5-year period, but what return over 5-years will be depends on when rates go up. If we project a gradual increase to about 4.5% that would mean an annualized 2.5% (not compounded).

The Total Bond Market Fund has a yield of about 4% and a duration of 3.7. So if the yield goes up gradually to 5% over 5 years, your annualized return would be about 3.75% (if we guess other factors even out). If yield goes up to 6%, annualized return would be about 3.5%. (This assumes interest rates go up gradually, sudden increase at end would lower total return).

You don't say which short term fund, but the short term index has yield of 2.7%, duration 2.6. If yield goes up to 4.7% over 5 years, annualized return would be about 2.7%.
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