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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76420  
Subject: Cash or Bonds Date: 1/9/2005 2:54 PM
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I have $20K in a Vanguard IRA which I won't need for at least 18 months. Right now it's in Prime Money Market with current yield of 1.97%. If the Fed keeps raising rates, I expect the yield to rise at about the same pace, though it will lag by a couple months.

I want the money to stay at Vanguard but am considering putting it in a bond fund for better return. I'm wondering whether the higher yields will make up for erosion of principal as the Fed raises short term rates. Any thoughts on the following funds would be helpful.

Vanguard Short Term Investment Grade - yield 3.28%, duration 2.2. Unless I'm missing something the risk to principal seems greater than the yield advantage.

Vanguard GNMA - yield 4.32%, duration 3.2.
Wondering if GNMA would be less sensitive to Fed raises, since mortgage rates have been sticky in the past year. Of course, that could change.

Vanguard Inflation Protected Securities - quoted yield of 1.22% does not include the inflation factor, duration 6.0.
The duration concerns me on this one.

Vanguard High-Yield Corporate - yield 5.80%, duration 3.9.
I mention this only because I already own it. It's 7% of my portfolio. I don't think I'd want to add more than $10K to it.

I've done a lot of comparison on these funds but would appreciate another opinion.



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