worry about bonds defaulting. In times of crisis, investors bid up the price of Treasuries so this fund will probably do well (though if interest rates rise, bond funds typically lose value). The Vanguard Short-Term Treasury Fund’s current yield is around 1.6%; the interest is exempt from state and local income tax (but not federal) because the fund holds Treasury issues.
The Fidelity Short-Term Bond Fund has a higher yield, around 2.8%, because it invests in corporate bonds and mortgage-backed securities as well as Treasuries. (Non-Treasuries usually pay higher yields because repayment isn’t as certain.) This fund fell by around 12% from 2003 to 2008, with more than 7% of the losses occurring during the panic of 2008, when bonds other than Treasuries suffered heavily.
“Short-term bond funds aren’t risk free,” Moore concedes, “but they’re low risk.” Indeed, the short-term bond fund track record is encouraging. In the past tumultuous decade, Morningstar’s short-term government bond fund category has yielded positive returns every year but two. The short-term bond fund category, including funds that hold nongovernment as well as government issues, has had only three losses—its most recent a 4.2% drop in 2008, when credit markets froze. Although past performance doesn’t guarantee future returns, it indicates that investors in short-term bond funds can probably collect a yield while they avoid steep losses.
This article originally appeared in the March 2010 issue of Black Enterprise magazine.