Flight to quality

I have an intermediate bond fund in my tax-deferred account. When I was selecting the bond fund, I had picked the Vanguard Intermediate-Term Investment-grade fund (VFICX) over the Vanguard Intermediate-Term Treasury fund (VFITX) for its slightly higher yield and also comparable credit quality (or so I thought!).

Today, it occurred to me that the recent credit crunch and the “flight to quality” of investor funds might have caused VFITX to outpace VFICX in terms of total returns. I looked up the YTD returns of the two funds and I was correct: YTD return of VFICX is 1.56% and that for VFITX is 2.65%.

The 6-month price history (does not reflect dividends) is shown below:

2007-08-10-vficxvsvfitx-480×270.png

Evidently, the “flight-to-quality” phenomenon has bidded up the price of treasury bonds versus non-treasury bonds.

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