Barron's Likes Short-Term Bonds
Barron's writes "Short-Term Bonds Yield 4%. Why They Could Beat Cash." The article tells us, "Until recently, short-term bonds were a yield wasteland: A two-year Treasury note yielded 0.21% a year ago and just 1% in January. Today, the yield is over 3.8% and could soon touch 4%, thanks in good measure to the Federal Reserve's aggressive interest-rate-hiking campaign.... But this could be a good entry point for short-term bonds: They may not fall much more, and yields are now high enough to withstand some price pressure. 'We are actually comfortable owning the front end of the yield curve here,' says Bob Miller, head of Americas fundamental fixed income at BlackRock.'" They also state, "Short-term funds have racked up losses this year. The iShares 1-3 Year Treasury Bond exchange-traded fund (ticker: SHY), a proxy for Treasuries, is down 3.85%, after interest. Yet some analysts think that short-term yields may now be close to pricing in the remainder of the Fed's rate increases. With yields at nearly 4%, there's far more of an income cushion against price declines. Investors may also scoop up a bit more income than with cash proxies like money-market funds, now yielding about 2%. 'When you have a 3.75% yield, that's much more manageable,' says Cary Fitzgerald, head of short-duration fixed income at J.P. Morgan Asset Management." The piece also says, "Tom Tzitzouris, head of fixed-income research at Strategas, says short-term yields are also now in the terminal ballpark. If that's the case, he adds, 'you're basically going to clip your coupons in two-year Treasuries because the market has already priced in the tightening.' Opportunities in shorter-term bonds aren't confined to Treasuries. `John Bellows, a portfolio manager at Western Asset Management, likes investment-grade corporate debt, which features both a yield component and some income from the credit risk embedded in the bonds." It adds, "Various mutual funds and ETFs offer exposure to the shorter end of the yield curve. For pure Treasuries, the $26 billion iShares 1-3 Year Treasury Bond ETF offers broad diversification at a low fee. It has an SEC yield of 3.31% and an expense ratio of 0.15%. For corporate bond exposure, consider the $43 billion Vanguard Short-Term Corporate Bond ETF (VCSH), an index fund covering the broad market. It sports an SEC yield of 4.22% and an expense ratio of 0.04%."
