Compared to their longer duration counterparts and U.S. equities, short-term bond strategies have been an option for fixed-income investors seeking a return in today’s rising rate environs, while also avoiding the volatility of the extended bull run in the stock market. While trade wars continue to cause bouts of volatility in the capital markets, short-term bond funds can be the elixir for risk-averse investors who want to minimize the impact of volatility and still earn a return given the rising rate landscape.
“Short-term bonds are now allowing you to pick up yield that you’re still generally not getting in any savings account, unless you hunt around for it,” said Dan Egan, director of behavioral finance and investments with online investment company Betterment. “And that yield is likely to go up over the next two to four years as interest rates in the U.S. continue to rise.”
Bonds with a shorter duration also reduce the exposure to inflation, which can tamp down the returns of fixed-income investments. In addition, bond giant Pimco found in an analysis that these short-term strategies have produced an annualized volatility of less than 1% over a 10-year period–compare this to stocks, which have produced a 15% annual volatility and 10% for long-term bond strategies.
“This has been a very long-running bull market, people have a lot of gains, and a lot of people are feeling like the music might stop sometime soon, and so they want to decrease the risk in their portfolio, and short-term bonds are a good way to do that,” said Egan.