Bonds and the Peculiarities of Yield

by

A rather melancholy depiction of financial instruments.

It has come to pass, as these things invariably do, that fixed income is no longer an afterthought, a forgotten corner of the portfolio gathering dust like a provincial bureaucrat’s forgotten decree. The Federal Reserve, in its infinite and often perplexing wisdom, has ceased its relentless ascent of the interest rate ladder. This, naturally, has stirred the slumbering beast of yield. Even the most short-sighted of Treasury bills—those fleeting, three-month promissory notes—now offer a return exceeding 3.5%. A most curious development, wouldn’t you agree? It suggests, at the very least, that capital deserves some consideration, a notion often overlooked in the grand theatre of speculation.

The question, then, is not merely whether to venture into the realm of bonds, but how. One might approach this with the cautious reserve of a seasoned gambler, or with the reckless abandon of a newly appointed tax collector. I, as one tasked with the stewardship of capital, lean towards a certain… pragmatism.

There are, in my estimation, two principal avenues: the fortress of short-term Treasuries, and the sprawling estate of the total bond market. The former, a bastion of defensive positioning, offers a modest, yet reliable, income stream. It is the choice of those who anticipate a deepening economic winter, a prolonged period of… let us say, ‘corrective adjustments’. The latter, a more expansive undertaking, seeks to capture a broader spectrum of yield, accepting a commensurately higher degree of… complication.

Within the Vanguard constellation, we find ourselves contemplating the Vanguard Short-Term Treasury ETF (VGSH 0.02%) and the Vanguard Total Bond Market ETF (BND +0.03%). Both are, in their way, perfectly serviceable instruments. One might even say… adequately constructed. Though, let us not mistake adequacy for brilliance. A well-made broom, after all, is still merely a broom.

Short-Term Treasuries Versus the Total Bond Market: A Contemplation

The Vanguard Short-Term Treasury ETF, a creature of habit and predictability, invests primarily in U.S. Treasury bonds with a maturity of one to three years. It currently yields 3.6%. A respectable figure, though hardly enough to fund a lavish lifestyle. It is, however, sufficient to ward off a certain degree of financial anxiety, a condition increasingly prevalent in our modern age.

The Vanguard Total Bond Market ETF, on the other hand, is a more ambitious undertaking. It casts a wider net, encompassing not only Treasuries, but also corporate bonds and those peculiar instruments known as mortgage-backed securities. It currently yields 4.2%. A slightly more enticing proposition, though one must be mindful of the inherent complexities. It is, after all, a marketplace teeming with unseen risks and bureaucratic inefficiencies. The expense ratios, at 0.03% for both, are… acceptable. Though one suspects a hidden tax collector somewhere is quietly enriching himself on the margins.

VGSH: A Refuge in Times of Trouble (Perhaps)

This ETF, in its unwavering conservatism, could serve as a remarkably low-risk income generator. It possesses the added benefit of acting as a potential counterbalance to a sharp decline in equity prices. Though, one must be cautious. History, as we all know, is a capricious mistress. In 2022, during that brief but unsettling period of soaring inflation, Treasuries failed to provide the expected protection. It was a most peculiar spectacle—a financial system simultaneously beset by rising interest rates and collapsing asset prices. A truly Kafkaesque experience.

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BND: A Diversified Portfolio, or a Complicated Mess?

This ETF, with its broad exposure to various bond categories, is perhaps better suited as a core portfolio allocation than as a pure risk-off tool. The Treasury component will behave predictably, more or less. But the 30% allocated to corporate bonds introduces a degree of uncertainty. These bonds, while offering a higher yield, are subject to credit risk and interest rate fluctuations. They may decline in value during a stock market correction, offsetting any potential gains. The diversification, while theoretically beneficial, may simply create a more complicated mess. It is, after all, the nature of bureaucracy to complicate even the simplest of tasks.

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Which Vanguard Bond ETF Should You Choose? A Most Difficult Question

Personally, I find myself leaning towards the Vanguard Total Bond Market ETF. The allure of a slightly higher yield, coupled with the potential for enhanced upside, is difficult to resist. While Treasury ETFs may serve as a more effective risk-off hedge, I am not entirely convinced that such a hedge is necessary at this juncture. The economic figures, while not entirely reassuring, suggest a degree of resilience. And in such an environment, the addition of corporate bonds may prove to be a prudent decision. Though, one must always be prepared for the unexpected. The world, after all, is a most unpredictable place.

Given the current conditions, and the likely trajectory of events, I believe the Vanguard Total Bond Market ETF represents the more sensible choice. It is, after all, a perfectly adequate instrument. Though, let us not mistake adequacy for brilliance. A well-made broom, after all, is still merely a broom.

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2026-02-17 19:03