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<<<How dangerous do you guys think short-term bond funds are (Duration of 1-2 years)?

I'm parking a percentage of my money there right now, in case the stock market comes down. Should I have it in a money market instead? We're talking 3% vs 2%.>>>


I don't think the short-term bond fund is worth the risk right now. Duration is telling you an interest rate increase of 1% will reduce principal 1 to 2%. You're getting only a 1% spread over the money market fund. And if short term rates do rise the money market yield will also rise. You do the math.

In 2004 I had money in a short-term bond fund for about 10 months. Yield was about 3% but when the Fed began raising rates the principal started dropping. By the time I bailed from the fund my total return was about equal to what I would have earned in a money market mutual fund. Ironically I went into the short-term fund because I expected intermediate funds to be hit harder by interest rate increases. As Alan Greenspan said this week the behavior of intermediate rates has been a carnondrum. Sometimes you just can't win.
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