Investors with long-duration bonds face a deeply discounted market when attempting to sell the security before maturity since rates are more likely to rise in in the long-term. Long-term bonds have more coupon payments left before the debt matures than short-term bonds. Consequently, if the interest rate rises, the long-term bond will be underpaying investors for a longer period, which makes the old debt security less attractive to investors.
Once the Federal Reserve lifts rates, ultra-short funds can reinvest maturing debt at higher yields. However, investors have to be aware that prices could dip.
iShares Short Treasury Bond ETF
ETF Trends editorial team contributed to this post.