Vanguard U.S. Government Bond Funds

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Vanguard U.S. Government Bond Funds

Vanguard Short-Term Treasury Fund

Vanguard Short-Term Federal Fund Vanguard Intermediate-Term Treasury Fund Vanguard GNMA Fund

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Contents

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

See the Glossary for definitions of investment terms used in this report.

About the cover: Since our founding, Vanguard has drawn inspiration from the enterprise and valor demonstrated by British naval hero Horatio Nelson and his command at the Battle of the Nile in 1798. The photograph displays a replica of a merchant ship from the same era as Nelson’s flagship, the HMS Vanguard.

On May 1, 1975, Vanguard began operations, a fledgling company based on the simple but revolutionary idea that a mutual fund company should be managed solely in the interest of its investors.

Four decades later, that revolutionary spirit continues to animate the enterprise. Vanguard remains on a mission to give investors the best chance of investment success.

As we mark our 40th anniversary, we thank you for entrusting your assets to Vanguard and giving us the opportunity to help you reach your financial goals in the decades to come.

Your Fund’s Total Returns. . . 1

Chairman’s Letter. . . 4

Advisors’ Report. . . 10

Short-Term Treasury Fund. . . 15

Short-Term Federal Fund. . . 31

Intermediate-Term Treasury Fund. . . 47

GNMA Fund. . . 62

Long-Term Treasury Fund. . . 80

About Your Fund’s Expenses. . . 94

Trustees Approve Advisory Arrangements. . . .97

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1 Six Months Ended July 31, 2015

30-Day SEC Yield Income Returns Capital Returns Total Returns Vanguard Short-Term Treasury Fund

Investor Shares 0.58% 0.33% -0.19% 0.14%

Admiral™ Shares 0.68 0.37 -0.19 0.18

Barclays U.S. 1–5 Year Treasury Bond Index 0.11

Short-Term U.S. Treasury Funds Average 0.16

Short-Term U.S. Treasury Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Vanguard Short-Term Federal Fund

Investor Shares 0.73% 0.41% -0.22% 0.19%

Admiral Shares 0.83 0.46 -0.22 0.24

Barclays U.S. 1–5 Year Government Bond Index 0.13

Short-Intermediate U.S. Government Funds Average -0.17

Short-Intermediate U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Vanguard Intermediate-Term Treasury Fund

Investor Shares 1.53% 0.80% -1.87% -1.07%

Admiral Shares 1.63 0.85 -1.87 -1.02

Barclays U.S. 5–10 Year Treasury Bond Index -1.66

General U.S. Treasury Funds Average -4.32

General U.S. Treasury Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Vanguard GNMA Fund

Investor Shares 1.98% 1.12% -1.07% 0.05%

Admiral Shares 2.08 1.16 -1.07 0.09

Barclays U.S. GNMA Bond Index 0.23

GNMA Funds Average 0.25

GNMA Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

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2

Six Months Ended July 31, 2015

30-Day SEC Yield Income Returns Capital Returns Total Returns Vanguard Long-Term Treasury Fund

Investor Shares 2.72% 1.24% -10.47% -9.23%

Admiral Shares 2.82 1.29 -10.47 -9.18

Barclays U.S. Long Treasury Bond Index -9.11

General U.S. Treasury Funds Average -4.32

General U.S. Treasury Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements.

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3 January 31, 2015, Through July 31, 2015

Distributions Per Share Starting Share Price Ending Share Price Income Dividends Capital Gains Vanguard Short-Term Treasury Fund

Investor Shares $10.75 $10.73 $0.034 $0.000

Admiral Shares 10.75 10.73 0.040 0.000

Vanguard Short-Term Federal Fund

Investor Shares $10.82 $10.79 $0.045 $0.006

Admiral Shares 10.82 10.79 0.050 0.006

Vanguard Intermediate-Term Treasury Fund

Investor Shares $11.66 $11.43 $0.094 $0.012

Admiral Shares 11.66 11.43 0.100 0.012

Vanguard GNMA Fund

Investor Shares $10.88 $10.71 $0.121 $0.054

Admiral Shares 10.88 10.71 0.126 0.054

Vanguard Long-Term Treasury Fund

Investor Shares $14.19 $12.61 $0.177 $0.100

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Chairman’s Letter

4

After a strong run in the last fiscal year, bond prices declined and volatility increased over the half year ended July 31, 2015. Demand from risk-averse investors, which had surged in January amid concerns about deflation and the shaky pace of global growth, slackened over much of the period, as the economic picture brightened and the Federal Reserve appeared closer to raising short-term interest rates.

With weakerdemanddepressing the prices

of longer-term bondsin particular, Vanguard Long-TermTreasuryFundreturned –9.23%. (Allreturnsandyields citedin thisletter are for the funds’ Investor Shares.) More

modest price declines forshorter-term

bondshelped the four other funds perform

better; theirreturnsranged from –1.07% forVanguardIntermediate-TermTreasury Fund to 0.19% forVanguard Short-Term FederalFund.

Inrelative terms, the two Short-Term Funds came inastep ahead of their

benchmarks, and the Intermediate-Term Funddid even better; the two other funds lagged theirs. Compared with their peers, the Short-TermFederalFundandInterm

e-diate-TermTreasuryFund outperformed

the average return for their peergroups.

The Short-TermTreasuryFund wasroughly inline with the average forits peergroup, while the two other fundslagged theirs.

The 30-day SEC yield forVanguard GNMA Funddeclined to 1.98% onJuly31 from

2.22% six months earlier. For the four other

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5 Market Barometer

Total Returns Periods Ended July 31, 2015 Six Months One Year Five Years (Annualized) Bonds

Barclays U.S. Aggregate Bond Index (Broad taxable market) -1.47% 2.82% 3.27%

Barclays Municipal Bond Index (Broad tax-exempt market) -0.92 3.56 4.39

Citigroup Three-Month U.S. Treasury Bill Index 0.00 0.02 0.05

Stocks

Russell 1000 Index (Large-caps) 6.60% 11.24% 16.45%

Russell 2000 Index (Small-caps) 6.98 12.03 15.27

Russell 3000 Index (Broad U.S. market) 6.61 11.28 16.35

FTSE All-World ex US Index (International) 4.26 -3.74 6.23

CPI

Consumer Price Index 2.12% 0.17% 1.83%

percentage point.)

Onaseparate note, the GNMAFund markedits35thanniversaryinJune.

I wouldlike to take this opportunity to thank the fund’sadvisor, Wellington Management Company, foritssteward

-ship of the fund throughout ourlongand

productive workingrelationship.

Fixed income fared poorly

both at home and abroad

Prices of U.S. taxable bondsdeclinedin four of the six months, producingareturn of –1.47%. U.S. municipal bondsheldup a little better, but the slide in their pricesmore than offset the income theygeneratedas well. Theirreturn was –0.92%. ex USD) returned –3.79%, curbed by the

dollar’sstrengthagainst many foreign

currencies. Without this currency effect,

international bondsreturnedabout –1%.

Returns were negligible formoneymarket fundsandsavingsaccountsas the Fed’s

target forshort-termratesremainedat 0%–0.25%.

U.S. stocks proved resilient

in a challenging environment

The broadU.S. stock market returnedmore than 6% over the six months. Corporate earningsgenerally exceeded forecasts,

andinvestorsseemed encouraged by the

monetarystimulus efforts of othernations’ central banks.

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6

Expense Ratios

Your Fund Compared With Its Peer Group

Investor Shares Admiral Shares Peer Group Average

Short-Term Treasury Fund 0.20% 0.10% 0.57%

Short-Term Federal Fund 0.20 0.10 0.97

Intermediate-Term Treasury Fund 0.20 0.10 0.51

GNMA Fund 0.21 0.11 0.95

Long-Term Treasury Fund 0.20 0.10 0.51

The fund expense ratios shown are from the prospectus dated May 27, 2015, and represent estimated costs for the current fiscal year. For the six months ended July 31, 2015, the funds’ annualized expense ratios were: for the Short-Term Treasury Fund, 0.19% for Investor Shares and 0.09% for Admiral Shares; for the Short-Term Federal Fund, 0.19% for Investor Shares and 0.09% for Admiral Shares; for the

Intermediate-Term Treasury Fund, 0.19% for Investor Shares and 0.09% for Admiral Shares; for the GNMA Fund, 0.20% for Investor Shares and 0.10% for Admiral Shares; and for the Long-Term Treasury Fund, 0.19% for Investor Shares and 0.09% for Admiral Shares. Peer-group expense ratios are derived from data provided by Lipper, a Thomson Reuters Company, and capture information through year-end 2014. Peer groups: For the Short-Term Treasury Fund, Short-Term U.S. Treasury Funds; for the Short-Term Federal Fund, Short-Intermediate U.S. Government Funds; for the Intermediate-Term Treasury Fund, General U.S. Treasury Funds; for the GNMA Fund, GNMA Funds; and for the Long-Term Treasury Fund, General U.S. Treasury Funds.

Greece’sdebt crisisandaswoon by

Chinese stocks weighed onglobalmarkets.

The strongU.S. dollar’snegative effect on the profits of U.S.-basedmultinational

companies, valuations that some investors

perceivedashigh, andmuddled economic

newsalso roiledstocksat times.

ForU.S. investors, internationalstocks returnedabout 4%; results wouldhave beenmore robust if not for the dollar’s strengthagainst many foreign currencies. Returns for the developedmarkets of Europe and the Pacific regionsurpassed

those of emergingmarkets, which declined.

Some of the uncertainties weighing on the

global economyliftedalittle as the half year

progressed. At home, growthseemed to

get back on track aftera first quartermarked

bysevere winter weatherin the Northeast

anda port strike on the West Coast.

The labormarket made gainsdespite job

lossesin the energysector, consumer

confidence heldup, and the construction sector continued to heal. Andabroad,

data on the pace of expansionin the euro zone andJapan provedmore robust than

expected, thanksin part to central bank bond-buying programsaimedat keeping

borrowing costslow to encourage hous

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stage at the beginning of the period.

Theyalso helped to counternegative

developmentssuchas flare-upsin the Greek debt crisis, the shift to aslower

pace of growthin China, and continued

weaknessin commodity prices.

Because of the brighter economic outlook

and the greaterlikelihood of aFedrate

hike, Treasury bondyieldsrose and prices

fellacross the maturityspectrum. This was especially true amonglonger-dated securities. The drop in bond prices cut

more than10 percentage points from the

return of the Long-TermTreasuryFund

andalmost 2 percentage points from the

Intermediate-TermTreasuryFund. Andin

thislow interest rate environment, there wasn’t alot of earnedincome to cushion

those price drops.

0.19 to 1.07 percentage points; they earned

enoughinterest income to push theirreturns into positive territory. (See the capitaland income returns by fundin the YourFund’s Total Returns table on page 1.)

Suchsharp price drops can be disconcer

t-ing. Keep inmind, however, that prices surgedhigherin the previoussix months and, for the 12 months endedJuly31,

returns forall five funds were positive.

More important, while bond pricesmay

fluctuate—sometimessignificantly—

income tends to be a biggerdriver of bond performance over the long term.

The shorter-than-benchmark durations of the short andintermediate funds

helped their performance relative to their

benchmarks. So, too, did theirallocations

Yields

30-Day SEC Yields on January 31, July 31,

Bond Fund (Investor Shares) 2015 2015

Short-Term Treasury 0.47% 0.58%

Short-Term Federal 0.59 0.73

Intermediate-Term Treasury 1.26 1.53

GNMA 2.22 1.98

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income overTreasuryandagencydebt.

The Intermediate-TermTreasuryFund

performed best, outstrippingits benchmark by 60 basis points.

peergroups. The Long-TermTreasuryFund

was the exception because its peersmay holdshort- andintermediate-termsecurities.

The Intermediate-TermTreasuryFund

Do you have the right ‘asset location’ for your bond fund?

Investors who want to maximize returnsandminimize taxesshould consider their “asset

location,” orhow theirinvestmentsare spreadamongdifferent types of accounts.

Broadlyspeaking, accountsare either tax-advantaged (asin tax-free or tax-deferred) or they’re taxable. IRAsand 401(k) plans, of course, are tax-advantaged.

As part of aseries calledIRA Insights (available at vanguard.com/research), analysts from Vanguard’sInvestment Strategy Group studieddata fromhundreds of thousands of Vanguard accounts to determine how wellinvestors were locating theirassets. Froma tax standpoint, were people choosing the optimalaccount type fora particularinvestment?

The analystsnoted that bondsare tax-inefficient, because theirreturnisalmost entirelyincome. So investorsare generally best served byholding them (and balanced funds, whichinclude bonds) inIRAsand other tax-advantagedaccounts. Otherwise, income from the bonds will drive up aninvestor’sannual tax liability, evenif the income isautomaticallyreinvestedina bond

or balanced fund. Andunlike qualifiedstock dividends, whichare taxedat a preferentialrate, bondincome gets taxedat ahigher “ordinary” income rate.

Asyou cansee inresultsshown below from the study, there appears to be an opportunity for some bondinvestors to improve theirasset location. These investorsmay be payingmore in

taxes than theyneed to.

Over half of investors with a choice own bonds in taxable accounts

Notes: Based on an analysis of almost 700,000 Vanguard IRA@_{account owners who also have taxable investments at Vanguard} and who own at least some bond investments. Data are as of December 31, 2014.

Source: Vanguard.

54% Bonds/balancedholdingsare in taxable accounts, withstock holdingsinIRAs

28% Bonds/balancedholdingsare in taxable accounts, but no stock holdingsare inIRAs

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group average.

The GNMAFund’sreturn wasvirtually flat, puttingit astep behindits benchmark and

peergroup. Holdinghigher-couponsecuri -tieshelped offset the drag fromitsduration anditsyield curve positioning.

Foramore detaileddiscussion of the

management of the funds, please see the

Advisors’ Report that follows thisletter.

As your investment costs go down,

your chance for success can go up

Beinganinvestor can be frustratingat times: You’re planning foryour financial

future, but some factors—for example, the financialmarkets—are beyondyour

control. Althoughyou can’t control the

markets, youdo have some choice in

how muchyou pay to invest in them.

And what you pay cangreatlyaffect your

chance forsuccess.

At Vanguard, asyou know, we take

minimizing costsseriously. Indeed, that’s one of our fourinvestment principles. (You canreadmore in

Vanguard’s Principles for Investing Success, available at vanguard.com/

research.) Payinglessin expenses

hasanintuitive, immediate appeal.

Less obvious, perhaps, is the enormous advantage that low costs can offer over time.

and each earningayearlyreturn of 6%, whichisreinvested overa30-year period.

In one scenario, the investor pays expenses

totaling 0.25% of assets everyyear; in the other, the investor pays 0.90%. (Keep in mind that thisisahypothetical example

anddoesn’t represent any particular investment.)

After30 years, the lower-cost portfolio

hasa balance of more than $530,000, while the higher-cost portfolio hasa

balance of almost $440,000. What might

seemlike a trifling cost difference at the

start becomesameaningfuldifference

in the long term—in this example, nearly

$100,000.

Increasingly, investorsrecognize the

importance of minimizing costs. According

to Morningstar, over the past 10 years, 95% of cash flowshave gone into funds rankedin the lowest 20% in terms of their

expenses. We’re pleased to see this trend, because it meansinvestorsare keeping more of theirreturns. Bydoingso, they’re

giving themselvesa better chance of

reaching their financialgoals.

Asalways, thank you forinvesting withVanguard.

Sincerely,

F. WilliamMcNabb III

Chairmanand Chief Executive Officer August 12, 2015

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For the Short-, Intermediate-, and

Long-Term Treasury Funds and the

Short-Term Federal Fund

For the six months endedJuly31, 2015,

returns for the U.S. Government Bond

Fundsmanaged byVanguard’sFixed

Income Group ranged from 0.24% for Admiral Shares of the Short-TermFederal Fund to –9.23% forInvestor Shares of the

Long-TermTreasuryFund. The returns of the funds exceeded those of their bench

-marks, except for the Long-TermTreasury Fund. Compared with the average returns

of their peers, the Short-TermFederal

andIntermediate-TermTreasuryFunds

outperformed, and the Short- andLong

-TermTreasuryFundslagged.

The investment environment

Volatilityin the bondmarket pickedup as

expectations continued to shift about the

strength of the economyat home and abroadas wellas the timing of the Federal

Reserve’s first interest rate increase in nearly tenyears.

Solidgrowthin the last half of 2014 led the market to anticipate aFedrate hike in March. But, asit didayear earlier, harsh

winter weather put a chill on the U.S. economy. The rapid fallin oil prices, while

saving consumersmoneyat the gas pump, put the brakes on energy-related employ

-ment and capitalspending. And while many

economists expected that consumers

would take advantage of the gassavings byspendingmore, theyinsteadshowed

caution by payingdowndebt andsaving

Yields of U.S. Treasury Securities

January 31, July 31, Maturity 2015 2015 2 years 0.52% 0.73% 3 years 0.83 1.05 5 years 1.27 1.62 10 years 1.75 2.26 30 years 2.32 2.94 Source: Vanguard.

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11 prompting the European CentralBank to

embark onits own quantitative easing

program. All of these factors, combined

withastrongerU.S. dollar that reduced import prices, squelchedinflationary

pressuresand contributed to the Fed’s decision to delayraisingrates.

The economyreboundedas the year

progressed, thoughmore modestly than

expected. Retailspending pickedup, the

housingmarket showedsigns of gaining

traction, and the economy continued to add

jobsat anannualrate of around 2 million.

But the data weren’t strong enoughand inflationstill wasn’t close enough to its 2% target for the Fed to raise ratesinJune, especially with the Greek crisis playing out

in the backgroundand Chinese growth

comingin weak. Although bondyields fluctuatedinresponse to these changesin outlook, they ended the fiscalhalf yearhigher. The 10-year Treasuryyield, for example, started the periodat 1.75%—alow not seensince 2013—and finished 51 basis pointshigher at 2.26%. (A basis point is one-hundredth

of a percentage point.) Longer-dated bonds rose evenmore sharply.

stance in the Short- andIntermediate-Term Fundsversus their benchmarks. (Duration isameasure of sensitivity of a fund’s holdings to changesininterest rates.) This

conservative positioning can be adrag on

performance whenratesare falling, but it

added to relative performance of the funds, especially the Intermediate-TermFund, over the six monthsasratesmovedhigher.

The TreasuryFundsand Short-Term FederalFundheldasmall overweight to

mortgage-backedsecurities that proved to be anet positive for the funds. We will

continue to look for opportunities to add to the funds’ exposure to these securities for

the potentialyield enhancement they offer.

Those oppor tunitiesmayarise should the outlook forvolatilitydecline or the securities’

valuationsreachmore attractive levels.

With the volatilityin the market, we had some successinmanaging the yield curve exposure of the funds. The shiftsin

expectationsabout when the Fed would raise interest ratesgave us the chance to position the funds tactically to benefit from

the compressionand widening of yields.

In the early part of the year, we added some 30-year break-even exposure as

energy prices collapsedand the outlook forinflationdimmed—amove that capturedadditionalreturn for the funds

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agencyandmortgage-backedsecurities sectors. The outlook We expect U.S. grossdomestic product to grow at anannualrate comfortablyabove 2% for the remainder of the year. We also anticipate that headline inflation will trend higher toward 2% in 2016.

Consequently, we think the initial “liftoff” of the Fed’s keyshort-terminterest rate will take place before the end of 2015. We expect anysubsequent increases to be

gradualanddone insmallincrementsgiven

the current disinflationary pressures of a strongU.S. dollar, the slowing of China’s

economy, andsoft commodity prices.

Of course, risinginterest rates put bond investorsat risk of short-termdeclinesin

principal. Nevertheless, we don’t expect

significant declinessuchas those that occurredin the “taper tantrum” of 2013, whenlonger-termrates jumpedinreaction

to news that the Fed expected to start windingdownits bond-buying program.

In fact, higherrates will enable the funds to reinvest the proceeds frommaturing securitiesat higheryields. Andagradual move to higherrates would be goodnews

for the economy. Unlike in past cycles, when the Fed tightenedmonetary policy to cooldownan economyindanger of overheating, ameasuredrise inshort-term rates wouldsignal that the economyno

longerneeds emergencysupport.

willnormalize, we remain cognizant of those risksand will continue to position the fundsaccordingly.

Gregory Davis, CFA, Principaland

Head of FixedIncome Group Gemma Wright-Casparius, Principal and Portfolio Manager

Brian Quigley, Portfolio Manager VanguardFixedIncome Group

August 14, 2015

For the GNMA Fund

For the six months endedJuly31, 2015,

Investor Shares of Vanguard GNMAFund returned 0.05% andAdmiral Shares returned 0.09%. The fundunderperformed its benchmark index as wellas the average

return of peer-group funds.

Investment environment

Growthin the majordevelopedmarkets stabilizedduring the period, while emerging

-market growth continued to languish, held

back byan economic slowdowninAsia. Economic datain the euro zone improved,

andmore countries participatedin the

upturn. Headline inflationrose, moving

back into positive territoryand triggeringa reboundininflation expectations. Though

the Greek debt crisismuddied the outlook, European CentralBank President Mario Draghiindicated that the central bank’s stimulusmeasures were filtering through

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its end. China’s central bank entered

anaggressive monetary-easing cycle to counterdeflationaryrisksandslowing growthafter first-quartergrossdomestic product hit its weakest levelsince the

global financial crisis.

U.S. datareleased toward the end of the periodsuggested that economic activity

pickedup aftera weak first quarter. On the consumerside, income growth was solid, consumptionrose, and confidence

remained elevated. The housingmarket

gainedsome momentumasnew and

existinghome salesrose andhome prices

continued to post healthygains. Payroll growthandunemployment trendsalso

remained favorable. The manufacturing sectorremained weak but showed early signs of agradualimprovement. Consumer

pricesrose but remainedsubdued ona year-over-year basis, a potential complica -tion for the Fedasit edges towardraising interest rates.

Despite loweringitsgrowthandinflation

forecastsslightlyat itsJune meeting, the

Fedhinted that U.S. rates were still on

track to rise later thisyear. The downward shift inFed officials’ predictions of interest

rates, however, signaledaslight delayin

the timing of hikes. Fed ChairJanet Yellen maintaineda cautious tone, noting that the

Federal OpenMarket Committee would raise rates onlygraduallyin the coming years; the precise timing of the first hike woulddependheavily ondataand events.

six months, underperformingduration -equivalent Treasuries by 0.30 percentage point asmeasured by WellingtonManag

e-ment. Earlyin the period, mortgage rates movedin tandem withinterest rates, while the latter part of the period wasdominated

byglobalmacro eventssuchas those in

Greece and China that weighed onmost

spreadsectorsduring the period. While

MBS were not immune, mortgage

underper formance wasrelativelysubdued andspreads ended the period five basis

points tighterat 28. Thirty-year Ginnie

Maes (GNMAs) marginally outperformed

conventionalmortgage securities (those backed byFannie Mae andFreddie Mac), while 15-year conventionalsunderper -formed30-yearsecuritiesandlower -couponMBS generallyunderperformed

those withhigher coupons.

Fund successes

The fund’sunderweight to 30-year GNMA MBS contributed to relative performance

during the period, asdid ourstake in

collateralizedmortgage obligations, which

outperformedMBS passthroughs. Coupon

positioningandsecurityselectionin the GNMAMBS market also helped, as our

overweights were concen tratedinhigh- couponseasonedsecurities. The fund’s underweights, on the otherhand, were focused onlower coupons that suffered more during the period.

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the fund’sunderperformance relative to its

benchmark. The fund was positioned with a flattening bias, whichhurt performance

as front-endyieldsincreasedless than longer-termrates. Its out-of-benchmark

allocation to Fannie Mae multi-family

DelegatedUnderwritingand Servicing securitiesalso weighed onrelative results.

Fund positioning

We are maintainingarelativelyneutral stance inMBS and will continue to adjust that position tacticallyasrelative value opportunitiesarise. Thoughspreads

widenedagainin the second quarter

andare wideryear-to-date, theyare not

yet at levels where we would consider addingrisk. Furtherincreasesinvolatility, brought on either bygeopolitical events or uncertaintyaround the Fed’snext move, could continue to put pressure onspreads. However, we expect the widening to be constrained because over the longer term,

increasesin the relative supply of Treasuries should create support forMBS. Inaddition, the U.S. rate structure’sattractiveness

compared with those of otherdeveloped marketsshoulddrive demand from international buyers.

conventionals (Fannie Mae- andFreddie

Mac-issuedsecurities) inlieu of GNMAs,

although we have reduced both positions as the sectors cheapened to some extent. Ourunderweight in GNMAsis concen -tratedin3%–4.5% coupons; we continue to view these assetsasmodestlyrichat current price spreads. Outside of pass -throughs, we continue to preferassets

withmore stable duration profiles, suchas Fannie Mae DelegatedUnderwritingand

Servicing bondsand collateralizedmortgage obligations, whichshould perform better

inan environment of risingvolatility. We continue to be positioned witha bias

towarda flatteryield curve.

MichaelF. Garrett

SeniorManaging Directorand

FixedIncome Portfolio Manager

WellingtonManagement CompanyLLP

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Volatility Measures Barclays 1–5 Year Treasury Index Barclays Aggregate Bond Index R-Squared 0.94 0.67 Beta 0.68 0.22

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

Fund Profile

As of July 31, 2015

1 The expense ratios shown are from the prospectus dated May 27, 2015, and represent estimated costs for the current fiscal year. For the six months ended July 31, 2015, the annualized expense ratios were 0.19% for Investor Shares and 0.09% for Admiral Shares.

Financial Attributes Fund Barclays 1–5 Year Treasury Index Barclays Aggregate Bond Index Number of Bonds 118 154 9,496 Yield to Maturity (before expenses) 0.9% 0.9% 2.4% Average Coupon 1.4% 1.6% 3.2%

Average Duration 2.3 years 2.7 years 5.6 years Average Effective

Maturity 2.5 years 2.7 years 7.8 years

Short-Term

Reserves -4.4% — —

The fund invested a portion of its cash reserves in equity and fixed income markets through the use of index futures contracts. After the effect of the futures investments, the fund's temporary cash portion was negative.

Share-Class Characteristics

Investor Shares

Admiral Shares

Ticker Symbol VFISX VFIRX

Expense Ratio1 0.20% 0.10%

30-Day SEC Yield 0.58% 0.68%

15

Distribution by Effective Maturity (% of portfolio)

Under 1 Year -4.8%

1 - 3 Years 82.8

3 - 5 Years 18.0

5 - 7 Years 4.0

Distribution by Credit Quality (% of portfolio)

U.S. Government 98.2%

Not Rated 1.8

Credit-quality ratings are obtained from Moody's and S&P, and the higher rating for each issue is shown. "Not Rated" is used to classify securities for which a rating is not available. Not rated securities include a fund's investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts. For more information about these ratings, see the Glossary entry for Credit Quality.

Investment Focus

Average Maturity Short

Treasury/ Agency Investment-Grade Corporate Below Investment-Grade Med. Long Credit Quality

Sector Diversification (% of portfolio)

Government Mortgage-Backed 4.8%

Treasury/Agency 95.2

The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government.

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All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

Performance Summary

See Financial Highlights for dividend and capital gains information.

Fiscal-Year Total Returns (%): January 31, 2005, Through July 31, 2015

Investor Shares

Barclays 1–5 Year Treasury Index Fiscal Year Income Returns Capital Returns Total Returns Total Returns

2006 3.20% -1.34% 1.86% 1.46% 2007 4.30 -0.48 3.82 3.83 2008 4.58 5.26 9.84 10.35 2009 2.70 1.79 4.49 5.84 2010 1.60 0.90 2.50 1.95 2011 1.09 0.83 1.92 2.94 2012 0.68 1.56 2.24 3.38 2013 0.41 -0.02 0.39 0.45 2014 0.36 -0.08 0.28 0.38 2015 0.51 0.50 1.01 1.75 2016 0.33 -0.19 0.14 0.11

Note: For 2016, performance data reflect the six months ended July 31, 2015.

16

Average Annual Total Returns: Periods Ended June 30, 2015

This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.

Ten Years

Inception Date One Year Five Years Income Capital Total

Investor Shares 10/28/1991 0.77% 0.91% 1.83% 0.87% 2.70%

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Financial Statements (unaudited)

Statement of Net Assets

As of July 31, 2015

The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s

Public Reference Room (see the back cover of this report for further information).

U.S. Government and Agency Obligations (104.6%) U.S. Government Securities (99.6%)

United States Treasury Note/Bond 0.500% 7/31/16 16,000 16,023

1 _{United States Treasury Note/Bond} _{0.500% 11/30/16 150,000 150,070}

Face Market

Maturity Amount Value•

Coupon Date ($000) ($000)

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Face Market

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6,972,313

Conventional Mortgage-Backed Securities (5.0%)

2,3,4 Fannie Mae Pool 3.500% 9/1/45 219,750 227,441

2,3,4_{Fannie Mae}_Pool _4.000% _{9/1/45 115,000 122,025}

2,3 Fannie Mae Pool 7.000% 11/1/15–3/1/16 19 19

2,3_{Freddie Mac Gold}_Pool _6.000% _{5/1/18–4/1/28 165 187}

2,3 Freddie Mac Gold Pool 7.000% 12/1/15–1/1/16 5 5

349,677

Total U.S. Government and Agency Obligations (Cost $7,297,451) 7,321,990

Shares

Temporary Cash Investment (1.8%) Money Market Fund (1.8%)

5 Vanguard Market Liquidity Fund

(Cost $126,578) 0.152% 126,578,000 126,578 Total Investments (106.4%) (Cost $7,424,029) 7,448,568

Expiration

Date Contracts

Liability for Options Written (0.0%)

Call Options on 10-year U.S. Treasury Note

Futures Contracts, Strike Price $127.00 8/21/15 115 (102)

Put Options on 10-year U.S. Treasury Note

Face Market

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Total Liability for Options Written (Premiums received $291) (306) Other Assets and Liabilities (-6.4%)

Other Assets 429,926 Liabilities (875,009) (445,083) Net Assets (100%) 7,003,179 Amount ($000)

Statement of Assets and Liabilities Assets

Investments in Securities, at Value

Unaffiliated Issuers 7,321,990

Affiliated Vanguard Funds 126,578

Total Investments in Securities 7,448,568

Receivables for Investment Securities Sold 404,175

Receivables for Accrued Income 19,085

Receivables for Capital Shares Issued 3,842

Other Assets 2,824

Total Assets 7,878,494

Liabilities

Payables for Investment Securities Purchased 865,347

Option Contracts Written 306

Other Liabilities 9,662 Total Liabilities 875,315 Net Assets 7,003,179 Market Expiration Value• Date Contracts ($000) 20

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Paid-in Capital 6,975,245

Undistributed Net Investment Income 22

Accumulated Net Realized Gains 4,606

Unrealized Appreciation (Depreciation)

Investment Securities 24,539

Futures Contracts (1,218)

Options on Futures Contracts (15)

Net Assets 7,003,179

Investor Shares—Net Assets

Applicable to 91,841,908 outstanding $.001 par value shares of

beneficial interest (unlimited authorization) 985,263 Net Asset Value Per Share—Investor Shares $10.73

Admiral Shares—Net Assets

Applicable to 560,965,018 outstanding $.001 par value shares of

beneficial interest (unlimited authorization) 6,017,916 Net Asset Value Per Share—Admiral Shares $10.73 At July 31, 2015, net assets consisted of:

Amount

($000)

• See Note A in Notes to Financial Statements.

1 Securities with a value of $2,601,000 have been segregated as initial margin for open futures contracts.

2 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in exchange for senior preferred stock.

3 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments and prepayments or the possibility of the issue being called.

4 Includes securities purchased on a when-issued or delayed-delivery basis for which the fund has not taken delivery as of July 31, 2015. 5 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the

7-day yield.

See accompanying Notes, which are an integral part of the Financial Statements.

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Six Months Ended July 31, 2015 ($000) Investment Income Income Interest1 _28,812 Total Income 28,812 Expenses

The Vanguard Group—Note B

Investment Advisory Services 341

Management and Administrative—Investor Shares 693

Management and Administrative—Admiral Shares 1,783

Marketing and Distribution—Investor Shares 110

Marketing and Distribution—Admiral Shares 499

Custodian Fees 36

Shareholders’ Reports—Investor Shares 87

Shareholders’ Reports—Admiral Shares 40

Trustees’ Fees and Expenses 3

Total Expenses 3,592

Net Investment Income 25,220

Realized Net Gain (Loss)

Investment Securities Sold 2,395

Futures Contracts 2,399

Options on Futures Contracts 555

Realized Net Gain (Loss) 5,349

Change in Unrealized Appreciation (Depreciation)

Investment Securities (22,633)

Futures Contracts 1,208

Options on Futures Contracts 841

Change in Unrealized Appreciation (Depreciation) (20,584) Net Increase (Decrease) in Net Assets Resulting from Operations 9,985

1 Interest income from an affiliated company of the fund was $30,000.

Statement of Operations

See accompanying Notes, which are an integral part of the Financial Statements. 22

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23

St

a

te

m

e

n

t o

f

C

hang

es

in

N

et

A

ssets

See accompanyingNotes, whichare anintegralpart of the FinancialStatements.

Six Months Ended Year Ended July 31, January 31, 2015 2015 ($000) ($000) Increase (Decrease) inNet Assets

Operations

Net Investment Income 25,220 40,290

Realized Net Gain (Loss) 5,349 6,339

Change in Unrealized Appreciation (Depreciation) (20,584) 32,196

Net Increase (Decrease) in Net Assets Resulting from Operations 9,985 78,825

Distributions

Net Investment Income

Investor Shares (3,227) (5,632)

Admiral Shares (21,993) (34,658) Realized Capital Gain1

Investor Shares — (1,321)

Admiral Shares — (6,943)

Total Distributions (25,220) (48,554)

Capital Share Transactions

Investor Shares (56,333) (111,518)

Admiral Shares 115,566 528,979

Net Increase (Decrease) from Capital Share Transactions 59,233 417,461

Total Increase (Decrease) 43,998 447,732 Net Assets

Beginning ofPeriod 6,959,181 6,511,449

End ofPeriod2 7,003,179 6,959,181 1Includesfiscal 2015short-termgaindistributions totaling$1,283,000. Short-termgaindistributionsare treatedas ordinaryincome dividends

for taxpurposes.

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Investor Shares

Six Months

Ended

For a Share Outstanding July 31, Year Ended January 31,

Throughout Each Period 2015 2015 2014 2013 2012 2011

Net Asset Value, Beginning of Period $10.75 $10.71 $10.73 $10.81 $10.70 $10.81

Investment Operations

Net Investment Income .034 .055 .039 .044 .071 .116

Net Realized and Unrealized Gain (Loss)

on Investments (.020) .053 (.009) (.002) .167 .089

Total from Investment Operations .014 .108 .030 .042 .238 .205

Distributions

Dividends from Net Investment Income (.034) (.055) (.039) (.044) (.071) (.116)

Distributions from Realized Capital Gains — (.013) (.011) (.078) (.057) (.199)

Total Distributions (.034) (.068) (.050) (.122) (.128) (.315)

Net Asset Value, End of Period $10.73 $10.75 $10.71 $10.73 $10.81 $10.70

Total Return1 0.14% 1.01% 0.28% 0.39% 2.24% 1.92%

Ratios/Supplemental Data

Net Assets, End of Period (Millions) $985 $1,044 $1,151 $1,448 $1,765 $1,874 Ratio of Total Expenses to

Average Net Assets 0.19% 0.20% 0.20% 0.20% 0.20% 0.22%

Ratio of Net Investment Income to

Portfolio Turnover Rate2_201% _87% _80% _{176% 302% 124%}

The expense ratio, net income ratio, and turnover rate for the current period have been annualized.

1 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.

2 Includes 57%, 22%, 0%, 63%, 120%, and 0% attributable to mortgage-dollar-roll activity.

Financial Highlights

See accompanying Notes, which are an integral part of the Financial Statements. 24

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Admiral Shares

Six Months

Ended

For a Share Outstanding July 31, Year Ended Janurary 31,

Throughout Each Period 2015 2015 2014 2013 2012 2011

Net Asset Value, Beginning of Period $10.75 $10.71 $10.73 $10.81 $10.70 $10.81

Investment Operations

Net Investment Income .040 .066 .050 .055 .082 .129

Net Realized and Unrealized Gain (Loss)

on Investments (.020) .053 (.009) (.002) .167 .089

Total from Investment Operations .020 .119 .041 .053 .249 .218

Distributions

Dividends from Net Investment Income (.040) (.066) (.050) (.055) (.082) (.129)

Distributions from Realized Capital Gains — (.013) (.011) (.078) (.057) (.199)

Total Distributions (.040) (.079) (.061) (.133) (.139) (.328)

Net Asset Value, End of Period $10.73 $10.75 $10.71 $10.73 $10.81 $10.70

Total Return1 0.18% 1.11% 0.38% 0.49% 2.34% 2.05%

Ratios/Supplemental Data

Net Assets, End of Period (Millions) $6,018 $5,915 $5,360 $4,879 $4,779 $4,690 Ratio of Total Expenses to

Ratio of Net Investment Income to

Portfolio Turnover Rate2_201% _87% _80% _{176% 302% 124%}

The expense ratio, net income ratio, and turnover rate for the current period have been annualized.

1 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.

2 Includes 57%, 22%, 0%, 63%, 120%, and 0% attributable to mortgage-dollar-roll activity.

Financial Highlights

See accompanying Notes, which are an integral part of the Financial Statements.

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Notes to Financial Statements

Vanguard Short-Term Treasury Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria.

A. The following significant accounting policies conform to generally accepted accounting principles

for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.

1. Security Valuation: Securities are valued as of the close of trading on the NewYork Stock Exchange

(generally 4p.m., Eastern time) on the valuation date. Bonds, and temporary cash investments acquired over 60 days to maturity, are valued using the latest bid prices or using valuations based on a matrix

system (which considers such factors as security prices, yields, maturities, and ratings), both as

furnished by independent pricing services. Structured debt securities, including mortgages and asset-

backed securities, are valued using the latest bid prices or using valuations based on a matrix system that considers such factors as issuer, tranche, nominal or option-adjusted spreads, weighted average coupon, weighted average maturity, credit enhancements, and collateral. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Other temporary cash investments are valued at amortized cost, which approximates market value. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s

pricing time but after the close of the securities’primary markets, are valued by methods deemed

by the board of trustees to represent fair value.

2. Futures and Options: The fund uses futures contracts and options on futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use offutures contracts are imperfect correlation between changes in market values ofbonds held by the fund and the prices offutures contracts, and the possibility of an illiquid market. The primary risk associated with purchasing options is that interest rates move in such a way that the option is out-of-the-money, the position is worthless at expiration, and the fund loses the premium paid. The primary risk associated with writing options is that interest rates move in such a way that the option is in-the-money, the counterparty exercises the option, and the fund loses an amount equal to the market value of the option written less the premium received. Counterparty risk involving futures and exchange-traded options is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate

counter-party risk, the fund trades futures and options on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract. Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of

Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).

During the six months ended July 31, 2015, the fund’s average investments in long and short futures contracts represented 2% and 3% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

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Options on futures contracts are also valued at their quoted daily settlement prices. The premium paid

for a purchased option is recorded in the Statement of Net Assets as an asset that is subsequently adjusted daily to the current market value of the option purchased. The premium received for a written option is recorded in the Statement of Net Assets as an asset with an equal liability that is subsequently adjusted daily to the current market value of the option written. Fluctuations in the value of the options are recorded in the Statement of Operations as unrealized appreciation (depreciation) until expired, closed, or exercised, at which time realized gains (losses) are recognized.

During the six months ended July 31, 2015, the fund’s average value of options purchased and options

written each represented less than 1% of net assets, based on the average market values at each

quarter-end during the period.

3. To Be Announced (TBA) Transactions: A TBA transaction is an agreement to buy or sell

mortgage-backed securities with agreed-upon characteristics (face amount, coupon, maturity)for settlement at a future date. The fund may be a seller of TBA transactions to reduce its exposure to the

mortgage-backed securities market or in order to sell mortgage-backed securities it owns under delayed-delivery arrangements. When the fund is a buyer of TBA transactions, it maintains cash or short-term investments in an amount sufficient to meet the purchase price at the settlement date of the TBA transaction. The primary risk associated with TBA transactions is that a counterparty may default on its obligations. The fund mitigates its counterparty riskby, among other things, performing a credit analysis of counterparties, allocating transactions among numerous counterparties, and monitoring its exposure to each counterparty. The fund may also enter into a Master Securities Forward Transaction Agreement (MSFTA)with certain counterparties and require them to transfer collateral as security for their performance. Under an MSFTA, upon a counterparty default (including bankruptcy), the fund may terminate any TBA transactions with that counterparty, determine the net amount owed by either

party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements.

At July 31, 2015, counterparties had deposited in segregated accounts securities and cash with a value of $1,954,000 in connection with TBA transactions.

4. Mortgage Dollar Rolls: The fund enters into mortgage-dollar-roll transactions, in which the fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the

future at a predetermined price. The proceeds of the securities sold in mortgage-dollar-roll transactions are typically invested in high-quality short-term fixed income securities. The fund forgoes principal and interest paid on the securities sold, and is compensated by interest earned on the proceeds of the sale and by a lower price on the securities to be repurchased. The fund has also entered into mortgage-dollar-roll transactions in which the fund buys mortgage-backed securities from a dealer pursuant to a TBA transaction and simultaneously agrees to sell similar securities in the future at a predetermined

price. The securities bought in mortgage-dollar-roll transactions are used to cover an open TBA sell

position. The fund continues to earn interest on mortgage-backed security pools already held and receives a lower price on the securities to be sold in the future. The fund accounts for mortgage-dollar-roll transactions as purchases and sales; as such, these transactions may increase the fund’s

portfolio turnover rate. Amounts to be received or paid in connection with open mortgage dollar rolls are included in Receivables for Investment Securities Sold or Payables for Investment Securities

Purchased in the Statement of Assets and Liabilities.

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5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s taxpositions taken for all open federal income tax years (January 31, 2012–2015), and for the period ended July 31, 2015, and has concluded that no provision for federal income tax is required in the fund’s financial statements. 6. Distributions: Distributions from net investment income are declared daily and paid on the first

business day of the following month. Annual distributions from realized capital gains, if any, are recorded on the ex-dividend date.

7. Credit Facility: The fund and certain other funds managed by The Vanguard Groupparticipate in a $3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.06% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate equal to the higher of the federal funds rate or LIBOR reference rate plus an agreed-upon spread.

The fund had no borrowings outstanding at July 31, 2015, or at any time during the period then ended.

8. Other: Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. Each class of shares has equal rights as to assets and earnings, except that each class separately

bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

B. The Vanguard Groupfurnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund based on methods approved by the board of trustees. The fund has committed to invest up to 0.40% of its net assets in Vanguard. At July 31, 2015, the fund had contributed capital of $615,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.25% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard. C. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

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Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of July 31, 2015, based on the inputs used to value them:

Level 1 Level 2 Level 3

Investments ($000) ($000) ($000)

U.S. Government and Agency Obligations — 7,321,990 —

Temporary Cash Investments 126,578 — —

Liability for Options Written (306) — —

Futures Contracts—Assets1₅₃₉_—_—

Futures Contracts—Liabilities1 ₍₄₅₉₎ _— _—

Total 126,352 7,321,990 —

1 Represents variation margin on the last day of the reporting period.

D. At July 31, 2015, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation)were:

($000)

Aggregate

Number of Settlement Unrealized

Long (Short) Value Appreciation

Futures Contracts Expiration Contracts Long (Short) (Depreciation)

5-Year U.S. Treasury Note September 2015 858 102,826 67

30-Year U.S. Treasury Bond September 2015 (375) (58,477) (808)

2-Year U.S. Treasury Note September 2015 262 57,394 (4)

Ultra Long U.S. Treasury Bond September 2015 (180) (28,716) (460)

10-Year U.S. Treasury Note September 2015 (74) (9,430) (13)

(1,218)

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss)for taxpurposes.

E. Capital gain distributions are determined on a taxbasis and may differ from realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax

character. Temporary differences arise when gains or losses are recognized in different periods for

financial statement and taxpurposes. These differences will reverse at some time in the future. The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For taxpurposes, at January 31, 2015, the fund had available capital losses totaling $2,928,000 that may

be carried forward indefinitely to offset future net capital gains. The fund will use these capital losses

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to offset net taxable capital gains, if any, realized during the year ending January 31, 2016; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward

balance above.

At July 31, 2015, the cost of investment securities for taxpurposes was $7,424,567,000. Net unrealized appreciation of investment securities for taxpurposes was $24,001,000, consisting of unrealized gains of $25,377,000 on securities that had risen in value since their purchase and $1,376,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the six months ended July 31, 2015, the fund purchased $7,357,919,000 of investment securities and sold $7,300,517,000 of investment securities, other than U.S. government securities and temporary cash investments.

The following table summarizes the fund’s options written during the six months ended July 31, 2015.

Premiums

Number of Received

Options Written Contracts ($000)

Balance at January 31, 2015 1,860 697 Options Written 6,529 2,437 Options Expired (2,991) (1,028) Options Closed (4,542) (1,815) Options Exercised — — Balance at July 31, 2015 856 291

G. Capital share transactions for each class of shares were:

Six Months Ended Year Ended

July 31, 2015 January 31, 2015

Amount Shares Amount Shares

($000) (000) ($000) (000)

Investor Shares

Issued 108,353 10,113 246,674 23,046

Issued in Lieu of Cash Distributions 2,952 275 6,416 599

Redeemed (167,638) (15,650) (364,608) (34,066)

Net Increase (Decrease)—Investor Shares (56,333) (5,262) (111,518) (10,421)

Admiral Shares

Issued 815,698 76,139 1,900,156 177,556

Issued in Lieu of Cash Distributions 18,270 1,704 34,796 3,251

Redeemed (718,402) (67,043) (1,405,973) (131,339)

Net Increase (Decrease)—Admiral Shares 115,566 10,800 528,979 49,468

H. Management has determined that no material events or transactions occurred subsequent to July 31, 2015, that would require recognition or disclosure in these financial statements.

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Volatility Measures Barclays 1–5 Year Gov’t Index Barclays Aggregate Bond Index R-Squared 0.90 0.79 Beta 0.83 0.29

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

Fund Profile

As of July 31, 2015

1 The expense ratios shown are from the prospectus dated May 27, 2015, and represent estimated costs for the current fiscal year. For the six months ended July 31, 2015, the annualized expense ratios were 0.19% for Investor Shares and 0.09% for Admiral Shares.

Financial Attributes Fund Barclays 1–5 Year Gov’t Index Barclays Aggregate Bond Index Number of Bonds 98 648 9,496 Yield to Maturity (before expenses) 1.1% 0.9% 2.4% Average Coupon 1.7% 1.6% 3.2%

Average Duration 2.3 years 2.6 years 5.6 years Average Effective

Maturity 2.7 years 2.7 years 7.8 years

Short-Term

Reserves -4.4% — —

The fund invested a portion of its cash reserves in equity and fixed income markets through the use of index futures contracts. After the effect of the futures investments, the fund's temporary cash portion was negative.

Share-Class Characteristics Investor Shares Admiral Shares Ticker Symbol VSGBX VSGDX Expense Ratio1 0.20% 0.10%

30-Day SEC Yield 0.73% 0.83%

31

Distribution by Effective Maturity (% of portfolio)

Under 1 Year 4.0%

1 - 3 Years 62.6

3 - 5 Years 26.7

5 - 7 Years 6.7

Distribution by Credit Quality (% of portfolio)

U.S. Government 95.7%

Not Rated 4.3

Credit-quality ratings are obtained from Moody's and S&P, and the higher rating for each issue is shown. "Not Rated" is used to classify securities for which a rating is not available. Not rated securities include a fund's investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts. For more information about these ratings, see the Glossary entry for Credit Quality.

Investment Focus

Average Maturity Short

Treasury/ Agency Investment-Grade Corporate Below Investment-Grade Med. Long Credit Quality

Sector Diversification (% of portfolio)

Government Mortgage-Backed 15.0%

Treasury/Agency 85.0

The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government.