Alright, I often opine about the wreck of a balance sheet that is our US government. Its true, so you can't really sleep at night owning long dated treasury bonds, or a long duration fixed income bond fund either in my opinion. (Or maybe you can, ignorance is bliss). Muni's are also problematic, but that is a state by state situation, and generally I know that NJ, California, Michigan, Illinois are all generally something to avoid. Other states I don't really know, but muni's are a mess. Either way, rate moves higher will hurt bond fund performance and I think its inevitable over the next few months and years.
So, then problem is, you are stuck owning a money market fund, or a bank savings account paying you barely above 0%. So what can you buy to get a little more yield? CDs are one option, one smart buddy recommend Ally Bank CDs because you can redeem them cheaply if rates rise. Keep it under the $500,000 (joint account) limit, and under 5 years. These guys are long residential mortgages and car loans, you may need that FDIC guarantee one day!
The ones below are the best I have found after much searching, I recommend a mix of the 2.
CSJ: This is an ETF, so trades like a stock, very liquid. They own short duration corporate bonds, 1-3 years to maturity, all investment grade. I'd much rather own this compared to short dated G7 government bonds. Yieldier, and corporates actually have decent balance sheets. Its traded down a bit, now its around 103.20. With the backup in yields, this has fallen, but not much. Today its yielding 2.61%. If you want to see the change in its NAV, here it is...boring but better than 0.02%, and far more liquid than a bank CD.
Historical Quarterly NAV Returns
Worst case: you would have been flat in 2008, not bad considering the market fell 38%.
PUBDX: Called the Pimco Unconstrained Bond fund, this one is perfect if you have no clue where you want to be duration-wise. (And if you dont know what duration is, then buy this one). Basically, these guys are able to be long or perhaps even short duration (which is the same as being short long-dated bonds). Right now they have an effective 3.0 year duration (average maturity cash flow weighted). They are up 5.9% ytd, and have held in quite well given the recent sell off in treasuries. (Note that Pimco's long duration govt bond fund is down 6% in the last 3 months vs this one is flat). I actually think short term that we get a bounce in treasuries (eg rates fall a bit). Either way, this one is well managed, currently yielding 2.2%. Smartly, these guys were very long duration last year, earning 12.8% in 2009.
I think a mix of these 2 would make a lot of sense. I know people are scared of the market. I would be more scared of generic government or long duration bond funds. Its awful to say, but usually the retail investor tends to be wrong over time, chasing returns. The correlation of capital into stock funds mirrors almost EXACTLY the market. That is, when the S&P hits new highs, cash going in to buy stock funds hits new highs too. When returns are negative, people take money out. And redemptions peaked at the bottom. This is the opposite of what you are supposed to do!
Bonds have been great performers throughout the crisis. Hence, flows into bond funds have been on a streak that mirrors the streak of cash going into stock funds leading up the 1999 stock market bubble. This is a good article if you have bought bond funds...I do believe the great bond bull run is over. (also more reason to own TBF).