While rising interest rates can drag on bond fund returns, they have less of an impact on bond funds with shorter durations. Additionally, given the flattening yield curve in the debt market, there is less incentive to chase after later-dated debt exposure.
“From post-crisis through 2017, investors in fixed income have had to move out along the curve to generate some yield, extending some duration risk, or taking a dip in quality,” Alfonzo Bruno, a research analyst for fixed-income strategies with Morningstar, told CNBC. “Now, we’re seeing investors re-allocate and revisit their risk tolerance.”
Safety In Short-Term Bonds
Consequently, short-term bonds are becoming a relatively safe investment with attractive yields as this fixed-income category may withstand both rising interest rates and inflationary risks, especially when compared to the longer-dated bond funds, whose yields are likely to dip in a rising rate environment.
Fixed-income investors can gain exposure to the short-end of the yield curve through targeted ETF plays. For example, the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY), which has a 1.87 year effective duration, has a 2.53% 30-day SEC yield. The Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO), which has a 1.9 year duration, comes with a 2.61% 30-day SEC yield. The Vanguard Short-Term Government Bond ETF (NYSEArca: VGSH), which has a 1.9 year average duration, shows a 2.6% yield. The SPDR Portfolio Short Term Treasury ETF (NYSEArca: SPTS) has a 1.83 year duration and a 2.63% 30-day SEC yield.
For more information on U.S. government debt, visit our Treasury Bonds category.