Barron's: Short Looks Better
Barron's writes "Short-Term Bonds Are Looking Much Better." They explain, "Investing in shorter-term bonds, a wasteland for many years thanks to ultralow interest rates, is a lot more appealing these days -- though it's hardly risk-free. The two-year U.S. Treasury note is now yielding around 2.87%, up from 1.55% a year ago, as the accompanying chart shows. The recent spike in yields has also made shorter-term securities much more competitive against longer-term holdings and dividend-paying stocks.... Ultra-short-term bond funds are 'currently offering more yield than they have since before the financial crisis, and given how flat the yield curve is, investors aren't getting paid much more to invest further out the maturity spectrum,' says Miriam Sjoblom, a director of fixed-income manager research at Morningstar. One such portfolio is the $20.2 billion Pimco Short-Term fund (PSHAX). The fund has returned 1.87% this year, about four percentage points ahead of the Bloomberg Barclays U.S. Aggregate Bond index, placing it in the top 10% top of its Morningstar category." It adds, "For all of its appeal right now, this strategy does present some risks. For example, short-term bond funds can face credit risk, notably the financial soundness of the companies whose credits are in the portfolio. 'Funds that take a lot of credit risk have generally performed well for the past several years,' but 'that could change if credit spreads widen because the economy slows or the market becomes more risk-averse,' says Morningstar's Sjoblom. Another potential concern is the liquidity of a fund's holdings."
