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I'm interested in your take on the bond-market at present. Suppose you were retired and needed annual income, but you didn't have enough capital to go the 100% safe treasury route and therefore needed to move out a ways on the yield/risk/duration continuum.

Here are some summary stats from Vanguard bond funds. I've assumed that current yield-to-maturity less MER is the best proxy for potential income going forward, although there is obviously default risk associated with the highest-yielding junk fund, reinvestment risk associated with the short-term funds, and interest-rate risk associated with the longer term funds.

Vanguard Fund Ticker Mtry YTM MER Net AdjYld Qual

HY Corporate VWEHX 6.3 10.1 0.27 9.83 9.83 Ba2
High Yield Muni VWAHX 9.1 5.1 0.19 4.91 6.55 A+
LT Corporate VWESX 21.2 6.7 0.30 6.40 6.40 Aa3
LT Bond Index VBLTX 22.3 6.2 0.21 5.99 5.99 AA1
IT Corporate VFICX 7.2 6.2 0.22 5.98 5.98 A1
CA Ins LT Muni VCITX 9.4 4.3 0.18 4.12 5.89 AAA
ST Corp Fund VFSTX 2.8 6.0 0.24 5.76 5.76 A1
LT Muni VWLTX 10.2 4.5 0.19 4.31 5.75 AA+
TIPs VIPSX 13.8 5.9 0.25 5.65 5.65 AAA+
Insured LT Muni VILPX 9.2 4.4 0.19 4.21 5.61 AAA
IT Bond Index VBIIX 7.8 5.7 0.21 5.49 5.49 AA2
LT Treasury VUSTX 19.7 5.5 0.29 5.21 5.21 AAA+
CA Ins IT Muni VCAIX 6.6 3.8 0.17 3.63 5.19 AAA
IT Muni VWITX 6.2 4.0 0.18 3.82 5.09 AA+
Total Index VBMFX 8.2 5.2 0.22 4.98 4.98 AA1
GNMA VFIIX 2.8 5.1 0.27 4.83 4.83 AA
IT Treasury VFITX 6.9 4.5 0.28 4.22 4.22 AAA+
ST Muni VMLTX 3.2 3.2 0.18 3.02 4.03 AA+
ST Bond Index VBISX 2.8 4.2 0.21 3.99 3.99 AA2
ST Federal VSGBX 2.9 3.9 0.28 3.62 3.62 AA
ST Treasury VFISX 2.9 3.4 0.27 3.13 3.13 AAA+
VST Muni VWSTX 1.2 2.5 0.18 2.32 3.09 AA+
Prime MM VMMXX 0.2 2.88 0.33 2.88 2.88

The 2 groups I see as most compelling right now are the investment grade corporates (leaning towards short-term, but int-term might be OK too) and the inflation-protected bonds. The TIPS yield assumes a 3% inflation adjustment, and they would be pretty pathetic if inflation averaged < 2%. For the munis, I used 25% marginal tax rate for Fed and 5% for CA, although for the individual involved, these are just guesses at this point. If the appropriate Fed rate is substantially higher, then the CA insured LT muni fund might look a lot better.

Unfortunately, this question isn't a hypothetical. I'm trying to provide some help to my mother-in-law, who got bamboozled into high-MER, load, underperforming funds and an asset allocation that might have been appropriate for a 30-year old, which she sure isn't. A capital base that could have funded her needs in perpetuity on 7.5% treasuries a year and a half ago is now 30% smaller, with 10-year treasuries yielding 4.5%. Ouch.

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