Fidelity: Short-Term Bonds Over Cash
Fidelity published, "The opportunity for short and intermediate bond funds," which tells us, "Many investors face a conundrum in 2025: Adding long-term bonds for diversification versus equities makes sense, but this could introduce unwanted volatility over the long term due to interest-rate risk. One way to potentially reduce this risk is by investing in short and intermediate investment-grade debt funds. Since 2012, these funds, on average, have generated 88% of the return of longer-term core bonds with 52% less volatility.... Why? The comparatively shorter-term securities in which short and intermediate bond funds invest have shown less sensitivity to movements in interest rates and spreads over time." The piece says, "Short and intermediate bond funds now look attractive relative to money market funds," explaining, "Interest rates were persistently low from 2008 until 2022 as the U.S. Federal Reserve maintained an easy monetary policy stance.... [Then] the Fed raised the Federal Reserve Overnight Funds Target Rate significantly beginning in 2022. `As a result, short-term yields increased to levels above longer-term bond yields.... However, during the fall of 2024, the Fed cut its target rate by 100 basis points, making yields on short and intermediate bond funds once again look attractive relative to money market funds." Fidelity adds, "Despite the historically strong performance of bonds when the Fed is cutting rates and the relative value of short and intermediate bonds, some investors still feel more comfortable staying in cash. Yet short and intermediate bonds have outperformed cash over time (regardless of the Fed rate cycle) with very few periods of negative returns. Moreover, the negative returns tended to happen during tightening cycles -- not when the Fed was cutting rates. We believe short and intermediate bond funds can make sense to improve yield and potentially add more total return.... Short and intermediate bond funds have offered attractive returns with significantly lower return volatility relative to longer duration bond funds over time. In addition, short and intermediate bond funds currently offer attractive yields and may outperform longer-duration bond funds in the current environment."
