BlackRock's Schenone on Short Bonds
BlackRock Fixed Income Product Strategist Karen Schenone posted, "Rising rates blog series: The double appeal of short-maturity bonds." She tells us, "One of the ways to navigate a rising rate environment is to reduce your exposure to bonds with greater levels of interest rate risk. For many investors, this means moving toward short-maturity bonds. In exchange for lower risk, these issues typically generate lower income than longer-maturity bonds.... The current market environment is unusual, however. A flatter yield curve means that short bonds are providing similar income to their longer-maturity counterparts -- while still reducing interest rate risk. Investors wanting to gain exposure to short-maturity bonds often do so through bond exchange traded funds (ETFs) or mutual funds, which typically hold a diversified portfolio of bonds with maturities less than five years." Schenone also says, "Note that ultra-short bonds, represented by 1- to 12-month US Treasury bills (T-bills), had very little price movement while increasing the income contribution over this time period [Dec. 2015 through June 2018]. Fixed-rate short-maturity sectors like U.S. Treasuries and credit with 1-3 years to maturity both had prices losses, but increased their income as rates went up. The clear winner over this period was floating rate notes, which had positive returns for both price and income." She adds, "The choice between ultra-short, short-term or floating rate bonds depends on your holding period and investment objectives. For a very short-term holding period, consider sticking to high-quality ultra-short maturities, such as less than one year. If you have a longer holding period (over 12 months), short-maturity fixed-rate bond ETFs can provide more income potential during rising rate periods if you can tolerate the price changes over the period. Exchange traded funds like iShares Short Treasury Bond ETF (SHV), iShares 1-3 Year Treasury Bond ETF (SHY) and iShares Short-term Corporate Bond ETF (IGSB) can provide investment options for those looking for exposure to short-maturity bonds."
