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I am thinking about moving some money that I normally keep in MM and credit union savings accounts to a Short-Term Bond Fund (either a Vanguard index or one of their Treasury or Federal funds)to try to squeeze a little more yield out. I can put up with a little bit of volatility in share price, but don't want a whole lot. This money is mainly my emergency fund or money I am holding to move into something else down the road when conditions are right (equities or I-Bonds if the rate increases). Has anyone had any experience doing the same thing and, if so, did it work out for you?

I've been hoping one of the local gurus would chime in here with some thoughts, since I'm wrestling with much the same problem, but this thread sort of wandered off into preferred-stock land, so I'll just put in my two cents and hope that someone with a clue argues with me:

It seems like a pretty good idea to me.

The big concern is the fact that rates are currently low, and so NAVs are currently high, so there's a very real risk (indeed, likelihood!) that the NAV will drop somewhat, even if you're looking at a short time horizon (0-3 years).

It looks from the historical data that I've seen, though, that most short-term bond funds (like, say, the Vanguard Short-Term Bond Index) tend not to lose money (after dividends) over periods longer than a quarter or so, and over most periods of even slightly longer than that you come away ahead.

The implication I draw from this is that while, yes, there is interest rate risk, for funds like that it's relatively small even when short-term rates are so unusually low, and that although now is a worse time than most to invest, you're still likely to come out ahead of money markets if you're willing to stomach brief drops in your fund balance and hold for at least six months to a year.

Anyone else have thoughts?
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