Late last week, we hosted our latest Crane's Bond Fund Symposium in Newport Beach, Calif. The keynote talk, "Ultra‐Short Bond Funds: Surf's Finally Up," featured J.P. Morgan Securities' Teresa Ho, PIMCO's Jerome Schneider and J.P. Morgan Asset Management's Dave Martucci. Ho explains, "What we're going to do ... is just give a high-level review of the short-term bond fund space from a performance perspective, flows, asset allocation. I'll ask Jerome and Dave to weigh in on some of these topics and for them to give a sense of some of the things that they're seeing and what they're thinking about, and after that I'll follow up with a brief comment on other ultra-short investors." (Note: Thanks again to those who supported BFS! Attendees and Crane Data subscribers may access the conference binder, Powerpoints and recordings via our "Bond Fund Symposium 2025 Download Center.")
She continues, "So just to set the scene ... 2024 was certainly a great year for ultra-short bond funds. They generated returns greater than 5% for all of 2024.... They outperformed the longer-duration strategies, and they also outperformed money market funds.... But with that being said, it certainly wasn't without its volatility.... So clearly, a lot of the flows movement is driven by returns -- performance does drive flows in this particular space. But through it all ... it was still a positive year for the short-term fixed income space. We're already seeing meaningful flows in January, and I think February is also going to be another positive month."
Ho says, "But what is really interesting is that while certainly we saw inflows into ultra-short and short-term bond funds, the flows into money funds were even more sustainable. In fact, as you can see on the slide, money funds saw pretty much record returns over the course of 2024. And this is a year that wasn't even marked by a crisis. The only other time that we saw more inflows into money market funds was 2020, that was COVID, and 2023, and that was the regional banking crisis."
She asks, "Is it still kind of an attractive space for people to be in, given the current environment that we're in right now?" Schneider responds, "Yes, it is an attractive environment. Context is important here, and we have to rationalize. One of the worst calls that has been made over the past 18 months has been the notion that all the money is moving from the money market fund $7.3 trillion to the equity market. Clearly [that's] not going to happen. But it's important to recognize a few things. One, the inertia of money market funds is huge, both from a safety perspective, i.e. looking to avoid volatility, as well as just the compounding effect of just earning, you know, 4% on an ongoing basis in terms of asset growth."
He comments, "Our job collectively at PIMCO's short-term team is to try to incentivize, and educate investors to the merits of being in that ultra-short space. It's basically proposing that you can have a high degree of quality portfolios, liquidity management over an intermediate horizon, and combine that to earn additional returns. There are a lot of folks who can appreciate that. That's where our combined businesses do really well. But there are even more people, clearly, who don't necessarily buy into that notion. That's always a challenge in terms of that educational process. But there will always be money in money market funds, and that's a good thing, because that's the foundational liquidity."
Schneider states, "But what we're finding ourselves in is a unique environment where that step out of cash, so to speak, is incredibly powerful, probably to the tune of hundreds of basis points or more at this point in time. So, from a practical point of view, yes, it makes sense to at least evaluate the ultra-short landscape and even short-term landscape, that one to three-year space in its totality as an opportunity set to earn additional premiums. And then the second thing is, we're beginning to see a more bifurcated landscape of those money market options."
He explains, "Timing is important, and not just from a duration call. We can go back to views of the market in a bit. But I think it's important to recognize that the 'T-bill and chill' era really had people lock up cash for three months, six months, a year, two years. Now all those maturities are coming due. People are engaging to have practical conversations about how to think about putting that money back to work. And it may not be in risk assets."
He adds, "The most exciting part about what has gone on in our universe is that growth of the ETF segment, since MINT was created as an actively managed strategy 15 years ago. It's taken a long time, accompanied by great products like JPST and the cohort of people in the ultra-short landscape. It's now a pretty diverse subset. So, people are finding their way in one way, shape, or form to that universe."
Martucci then tells us, "The great part of the ultra-short space throughout my career is there's always been a way to talk about it and spin it. I mean ... whether rates were at zero, it was like, 'You're going to sit at zero, and you can get 30 to 50 base points.' Then in 2022, in '21, rates were going up, and you had inflation. You're like, 'Okay, then we went after the long-term fixed income investors and say, oh, I want you to come down the curve.' We'll give you an opportunity to get a little more of the cash, and you don't have to take that interest rate risk. Now, we're again at that point where basically the Fed has acknowledged that their base case is that inflation is going up and growth is coming down. I think that leads to really a tailwind for all of our products in the front end."
He then says, "If you could build a portfolio that is out-yielding ... a money market fund, which you can now, and you also have the ability to capture some duration and not take too much risk out the curve, it really does seem to be a sweet spot for us, and we expect that to continue. But to echo Jerome's comment, that T-bill and chill mentality was definitely where a lot of our conversations on the institutional side are happening, where there's a lot of, you know, large institutions or family offices or what have you that were just rolling bills, and now all of a sudden, you know, the curve is inverted. So it's not necessarily the highest point along the curve."
Finally, Martucci tells us, "You can produce a competitive yield. You can show attractive returns over the past year from rolling that strategy. So I think that is where most of our discussions are, and then we are starting to see more retail-type investors. I think that's [driven by] the acceptance of the ETF, which has been great for us as a platform across the board in the ultra-short space as an investment tool for clients, and mostly that's been on the retail segment is where the ETFs has had the most success."
