While searching for a good Low-Duration or Ultrashort bond type fund, I came across Vanguard Short-Term Tax-Exempt fund (Symbol: VWSTX). I was specifically looking for the fund with duration of 1 year or less, which is what I found with this fund. This fund has current yield of 2.61%.
Before I invested in the fund, I wanted to check the yield of the Vanguard Tax-Exempt Money Market Fund (symbol: VMSXX) to find out how much access return I was getting for getting risky with extra duration.
To My surprise, I found out that the yield on the Money Market Fund is higher than the short term bond fund. The duration of the Money Market fund is only 23 days.
Why is this? My guess is that short rates have come up too fast is last 9-10 months, which caused the money market rate to shoot up faster than the short term bond fund. The bond fund may be carrying the low yielding bonds from the 10 months ago period on its portfolio.
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