Why Short-Term Bonds Now?
Why it matters
- Short-term bonds can help clients preserve their investment principal and dampen portfolio volatility.
- The flatness of the Treasury Yield Curve helps to make a case for short-term bonds.
- When compared to bonds with longer maturity, short-term bonds can help hedge against interest rate risk.
Against the backdrop of market volatility and the Federal Reserve ratcheting up interest rates to battle inflation, short-term bonds hold a lot of investor appeal.
The benefits of short-term bonds
A short-term bond fund invests in bonds that mature in five years or less. They can offer a potential way to preserve principal and minimize interest rate risk compared to bond funds with longer durations, while also providing a source of income.
The Treasury yield curve
The Treasury yield curve makes a compelling case for short-duration assets such as short-term bonds.
- Given the flat yield curve we are seeing today, investors may not be appropriately compensated for opportunities on the intermediate or long end of the curve relative to its front end. Additionally, with several future Federal Open Market Committee (FOMC) rate hikes priced into the market, interest rate volatility on the front end of the curve could be muted relative to the historic interest rate volatility experienced in the first half of 2022.
- As the FOMC raises the federal funds rate and financial conditions tighten, the economy could potentially slow as a result. In that scenario, lower quality parts of the credit quality spectrum could begin to experience higher bouts of volatility relative to higher credit quality areas of fixed income, including investment-grade corporate and securitized bonds.
- Corporate fundamentals remain strong, but we are mindful of potential margin pressure and cautious on leveraging mergers and acquisitions activity.
- Many securitized subsectors remain supported by healthy consumer balance sheets, and Commercial Real Estate (CRE) fundamentals are continuing to heal.
Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be appropriate for all investors.
Fixed income securities are subject to risks including credit risk, interest rate risk, counterparty risk, prepayment risk, extension risk, valuation risk, and liquidity risk. The value of fixed income securities generally goes down when interest rates rise, and therefore the value of your investment in the fund may also go down.
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.