15-year total return from popular Vanguard index funds through 12/31/14 shows bonds beating stocks since 1999 except on the short end

Per annum return per Morningstar tonight:

Total international stock index, VGTSX = 2.96%

Short term bond index, VBISX = 4.05%

S&P 500 stock index, VFINX = 4.13%

Total stock market index, VTSMX = 4.75%

Total bond market index, VBMFX = 5.45%

Intermediate term bond index, VBIIX = 6.52%

Long term bond index, VBLTX = 8.37%

Vanguard bond index funds, 15 year performance per annum vs. stocks

HMS Vanguard

Per morningstar.com, annual performance 15 years to date for all popular bond index funds beats stocks hands down, except for the short index:

VBISX: 4.05% (short)

VBMFX: 5.42% (total)

VBIIX: 6.48% (intermediate)

VBLTX: 8.30% (long).

Average annual total nominal return from the S&P500, dividends fully reinvested, has been only 4.52% per annum.

That's what happens when stocks are inflated in value over a long period of time, as they have been almost continuously since the late 1990s, except for about four years between 2008 and 2012. And remember, present gains off those lower valuations are already part of the relatively poorer performance of stocks over the last 15 years. It could be much worse.

Impact of a '94-style bond debacle on today's NAVs of popular Vanguard bond index funds

In November and December 1994, the NAVs of some popular Vanguard bond index funds hit their lowest levels in memory during that year's bond market meltdown. What if we revisited those lows today? How much could you lose, both in value and in time?

On the short end, VBISX at 10.53 to start the week would have to fall to 9.50 to match that debacle low from December 1994, wiping out 9.78% of value. With a duration of 2.7 years, presumably you'd have to sit tight almost three years from such a low to recoup your losses as the fund replaced its maturing issues with higher yielding short-term instruments in the new landscape. 

In the intermediate space, VBIIX at 11.46 now would have to fall to 9.16, the November 1994 low, wiping out 20.07% of value. Your duration-implied wait to recoup your losses there is 6.5 years.

VBLTX in the long term space at 13.59 today would have to fall to the November 1994 level of 8.87 to match the November 1994 low, wiping out 34.73% of value. Could you wait 14.5 years to recover from that?

Consider also VBMFX, the total bond index. At 10.82 this week it would have to fall to 9.15 to match the November 1994 meltdown low. That would wipe out 15.43% of value from here. Time to recovery based on duration of the fund? 5.6 years.

Or VFIIX, the Ginnie Mae fund. Current net asset value started the week at 10.73. That would have to fall to 9.54 to match the November 1994 meltdown low, wiping out 11.09% of value. Duration for that fund is 5.5 years.

Many Americans have fled to bond funds for safety in the wake of the financial panic 6 years ago. By doing so, they have driven NAVs to levels in such funds never before seen in their histories, helping to create a bubble. Exiting from such bubbles is not easy when everyone suddenly wants to do so at the same time.

No wonder market timer Bob Brinker of Money Talk Radio Program fame has recently gone ultra short duration for his fixed income investing. He has picked funds which have durations of about one year. That's it.

The wisdom of the move is not yet well appreciated because of what it is not telling you: that a stock market crash is coming, right after the bond market nose dives. He doesn't want to be caught booking huge bond losses in his portfolios when the opportunity to invest new cash will present itself not long after. In other words, I think this is Brinker's way of raising cash now without saying so.

Not advice. Just my humble opinion.  

Current premiums you will have to pay to own popular Vanguard bond funds

Trading above the 10.40 level since August 2009, almost 5 years, Vanguard's short term bond index fund VBISX is currently priced at 10.55, a premium of 1.44%. The average annual return for the last three years through April has been 1.53% according to Vanguard. Current assets total $35.7 billion.

Trading above the 11.00 level since May 2010, 4 years, Vanguard's intermediate term bond index fund VBIIX is currently priced at 11.48, a premium of 4.36%. The average annual return for the last three years through April has been 4.92% according to Vanguard. Current assets total $14.7 billion.

Trading above the 12.00 level since April 2011, 3 years, Vanguard's long term bond index fund VBLTX is currently priced at 13.55, a premium of 12.92%. The average annual return for the last five years through April has been 9.73% according to Vanguard. Current assets total just $6.5 billion.

Trading above 10.50 since April 2010, 4 years, Vanguard's total bond market index fund VBMFX is currently priced at 10.83, a premium of 3.14%. The average annual return for the last three years through April has been 3.41% according to Vanguard. Current assets total a whopping $113.6 billion. 

Vanguard's Worst Performing Bond Funds In 2013

Long Term Treasury Fund, VUSTX:                          -13.03%

Long Term Government Index Fund, VLGSX:     -12.74%

Long Term Bond Index Fund, VBLTX:                       -  9.13%

Inflation Protected Securities Fund, VIPSX:          -  8.92%

Long Term Corporate Bond Index Fund, VLTCX: -  6.86%

Long Term Investment Grade Fund, VWESX:       -  5.87%

And as badly as they have performed, I don't see a net asset value for any fund which represents a bargain: they all still look too expensive to me. 

Bond Mutual Fund Prices Remain Expensive, Returns Negative: Cash Has Been King

Bond mutual fund prices remain expensive by historical standards despite the recent carnage, while returns have been negative. For a safe haven, cash has been the place to be over the last year, such as it is.

For example, the short duration bond index fund from Vanguard, VBISX, finished the week at 10.51, 1.05% above the high end of normal (10.40). Vanguard reports returns down -0.27% for this fund in the last year.

The intermediate duration total bond index fund from Vanguard, VBMFX, a mixture of short, intermediate and long bonds, finished the week at 10.61, 1.04% above the high end of normal (10.50). Vanguard reports returns down -2.77% for this fund in the last year.

The pure intermediate duration bond index fund from Vanguard, VBIIX, finished the week at 11.24, 2.18% above the high end of normal (11.00). Vanguard reports returns down -3.66% for this fund in the last year.

Meanwhile the long duration bond index fund from Vanguard, VBLTX, finished the week at 12.51, 4.25% above the high end of normal (12.00). Vanguard reports returns down -10.01% for this fund in the last year.

Add in the insult of all items inflation of 1.5% to these miserable returns over the last year and cash was the place to be for safety even though it is also down because of inflation (gold, by the way, has fallen, per the London Fix, from 1758.50 on September 20th, 2012 to 1349.25 on September 20th, 2013, a decline of 23.3%).

Clearly such bond funds have farther to fall before they become attractive safe havens once again.