In a vlog posted in July, Jerome Schneider, head of short-term portfolio management for PIMCO, argues that the front end of the U.S. bond market may provide investors a good balance of liquidity, capital preservation and income in a rising rate environment.

Schneider outlines the following five reasons:

  1. The potential for positive absolute return exists in a diverse, short-term portfolio that includes U.S. Treasuries, corporate bonds and “structured products.”
  2. The market’s gently increasing volatility increases the appeal of short-term bonds, which offer lower volatility relative to equities and longer-duration fixed income securities.
  3. Rising rates—although bond prices typically fall when interest rates rise, the yield for those investments rises. So, reinvesting into higher yields over time can increase a bond portfolio’s overall return potential, says Schneider.
  4. Investors should take into consideration how rising inflation could impact portfolio returns, according to Schneider, who adds that short-term bonds offer the potential to shield investors from such effects.
  5. Low cost of liquidity—short-term bonds, he says, offer a low-cost place to manage liquidity.

For more trends in fixed income, visit the Fixed Income Channel.

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