Here we took a look at one of Vanguard Bond Funds: VFSTX. Yield 4.41%; YTD return 10%; investment grade corporate bonds; average maturity 2.6 yr.
It suffered a 10% drop in price in 2008. The actual return was -5%, which was big in short term investment grade bond fund.
What was the cause of that big drop? Client redemption? Maybe considering credit crisis occurred last year. A few bond holdings went under? Maybe too. Had it owned Lehman Brother, for example.
It’s quite interesting that it has a unusual V-shape recovery after the drop. Obviously the relative higher yield has been attracting a lot of investors looking for better returns on their short term investment. Has it also attracted a lot of people who are basically using it as money market funds? Maybe.
Another reason for the recovery might be the valuation of its certain holdings has recovered since the credit crisis.
For comparison, here’s Fidelity FBNDX chart, which showed similar drop last year.
If you have owned similar fund, you probably want to pay closer attention to its price movement.
Here’re some facts and links that may help anyone who is researching on stable value funds.
Personally, I put all the cash in my 401(k) into a GIC, which works just like a money market fund as sweep account to trade other mutual funds in the 401(k) account. Currently it yields a little over 4% annually.
Stable Value Funds
Preserve principal and earn a stable rate of return. Their current average yield is around 4%.
Funds own high-quality asset-backed securities, corporate bonds, U.S. Treasuries.
Funds have returned 7.19% annually over the past 10 years, vs. 5.28% for money market funds and 8.45% for taxable bond funds.
The links in no particular order:
SEC Splotligh on Stable Value funds
If you think the bond market is close to its top, you might consider shorting it. How? Here’s one way to short bond – buy this Rydex Juno fund (RYJUX) (annual expense ratio 1.4%). The downside risk is that the interest rate may go even lower or stay low for a while. The upside is that the interest rate moves higher.