Barron's on Bond Funds vs. Cash
Barron's writes, "These Bond Funds Are Better Than Cash. It's Time to Go Longer." The piece states, "Many income investors have gravitated to cash these past few years, given the juicy yields at the front end of the yield curve. The yield curve was inverted until recently, and it made sense for investors to park money in shorter-dated products, including money-market funds. That had the added benefit of minimizing duration risk—a bond price's sensitivity to changes in interest rates. Now, though, moving further out on the curve appears more favorable for bond investors looking for income.... Cash is hardly trash, but it has lost some of its luster as longer-term yields have moved up. The Crane 100 Money Fund Index, which tracks the largest money-market funds, has a 4.19% average seven-day yield—down by nearly a percentage point from 5.13% on July 31 of last year." Barron's comments, "The 10-year U.S. Treasury yield, meanwhile, has risen sharply in recent months, even as the Federal Reserve has slashed short-term rates by one percentage point since September. The 10-year note is at around 4.4%, versus 3.75% in late September. The five-year Treasury over that period has climbed to around 4.2%. While there's a good case for moving out of cash toward the middle of the curve, adding even longer-dated holdings looks like a riskier move. The Vanguard Long-Term Treasury exchange-traded fund's one-year return is about minus 3%; the ETF has posted negative results in three of the past four calendar years. Rising interest rates were a big headwind." The article adds, "Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments, also prefers moving from cash to bonds—in his case Treasuries with maturities of up to seven years.... [T]he average life of the holdings in the $49 billion JPMorgan Core Bond fund was just over six years.... As the table above shows, other options include the Baird Aggregate Bond fund, the American Funds Bond Fund of America, and the Vanguard Total Bond Market ETF."
