Ryan

The Bond Market is Fine

Okay, yes, there is a credit crunch going on out there, related to something called “subprime mortgages”, basically, mortgages given to people who had no business getting them, by brokers who had no business giving them out. But in reality, as long as you do one very smart, essential thing, the bond portion of your portfolio will be fine.

That one thing: buy quality!

Bond funds like the Vanguard GNMA and the Vanguard Total Bond Market Index–those that invest in quality bonds–are doing fantastic. Looking up what the average quality is of bonds that are in these funds tells you why.

Bond ratings by Moody’s (one of the recognized authorities in rating bonds) start at Aaa (highest), then to Aa1, Aa2, Aa3, A1, A2, A3, then into the B category. Bonds that are rated with a Baa or less are considered less than investment grade (”junk bonds”). If the bonds are of lower quality, the interest rate must be higher to attract investors who may be willing to risk the higher chance of losing their principle due to the higher yield of the low quality bond.

On the other hand, high quality bond funds–the Vanguard GNMA has an average quality of Aaa, and the Vanguard Total Bond Market Index has an average quality of Aa1/Aa2–are paying very decent yields with virtually no risk of default. Government National Mortgage Association issues, also known as “Ginnie Maes”–those that make up the Vanguard GNMA Fund–are direct obligations of the United States government. You can’t get a better quality rating than that! Given how they’ve performed–VFIIX yielding over 5% right now, and VBMFX yielding 4.87%–why take the risk of lower credit ratings? It takes a lot of interest payments to make up for losing your principle, so don’t take the chance of losing it! Go with quality and your bond portfolio will be more than fine.

One Response to “The Bond Market is Fine”

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