Short-Term Bonds
Short-term bonds are those with a maturity date of less than five years. Any entity can issue short-term debt, including all levels of government (federal, state, local), as well as corporations.
A short-term bond fund is a fund that invests in short-term bonds. A short-term bond fund’s portfolio may include things like variable-rate corporate and real estate debt, taxable municipal bonds, packages of car loans and credit card bills, revolving equity credit lines, and even soon-to-mature junk bonds.
Keep in mind that risk and yield typically go hand-in-hand in the bond market. So lower-risk bond funds will often have lower yields than bond funds with higher-risk bonds with longer maturities.
Why Invest in Short-Term Bond Funds?
Short-term bonds are attractive to investors for 3 reasons:
- They’re low-risk. A key characteristic of short-term bonds is that they tend to have lower interest rate risk than intermediate- or long-term bonds. That’s because the shorter maturities normally translate to a lower risk of losing some of your principal.
- Predictable income. The yield of the fund’s portfolio is known on a daily basis and bonds are attractive because of the promise of repayment of your original investment at maturity.
- They offer a potentially higher yield than money market funds. A portfolio mix with a wide variety of bonds is why short-term bond funds offer higher yields than money market funds. Short-term bond funds can offer a decent yield advantage relative to money market funds—anywhere from 0.5%–2%, depending on their underlying investments—and this can add up over time.
However, one key feature of short-term bonds is that they are highly sensitive to expectations for interest rates.
So if market participants expect the Fed to raise interest rates in order to combat inflation, then the yields on shorter maturity bonds (such as a 2-year Treasury note) will quickly rise to meet those expectations.
The end result is a drop in the share price of the bond fund, although its drop will be less than that for bonds funds holding longer maturity bonds. That provides a better ratio of return for the risk taken.
In simple terms, all bonds carry default risks, interest rate risks, as well as the risk of rising inflation.
Short-term bond funds minimize these risks. Holding bonds that mature in just a few years means less opportunity for interest rates and inflation to fluctuate unpredictably higher. This makes these bond funds valuable to investors who want to know what will happen with their money.
These characteristics mean short-term bond funds are highly liquid. Their lower volatility and near-term bond maturities mean that investors get their money back quickly, which also makes them very easy to sell.
Short-term bond funds are usually best used as a way to keep money liquid and secure, but to get a better rate of return than a bank or money market can offer.
How to Invest in Short-Term Bond Funds
If you count yourself among those investors who need to prioritize capital preservation, short-term bond funds may be the right answer for you.
Please note though that not all short-term bond funds are created equal.
Some funds invest in securities with higher credit risk, such as high-yield bonds, as they seek to offset the low-yield environment.
Before buying a fund, be sure to check its recent daily fluctuations relative to its peers. If it exhibits above-average volatility, that’s an indication that it may not offer the safety typically associated with short-term bond funds.
To help in your search for the right short-term bond fund for you, check out www.magnifi.com. You can discover investing ideas at Magnifi by using natural search. You just type in a term like “short-term bond funds for retirement income” and instantly get relevant, tailored results without having to run screener and charts.
Unlock a World of Investing
with a Magnifi Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as April 8, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Short-Term Government Bonds
Short-term bonds are those with a maturity date of less than four years. Any entity can issue short-term debt, including all levels of government (federal, state, local), as well as corporations.
U.S. government bonds are called Treasuries. They are issued by the federal government and are considered to be among the safest investments you can make, because all Treasury securities are backed by the “full faith and credit” of the U.S. government.
Treasury securities are exempt from state and local taxes.
What Are Treasuries and Short-Term Government Bond Funds?
U.S. Treasuries come in all sorts of maturities from as short as one month to 30 years. The shorter term Treasuries are called Treasury bills (from one month to one year); intermediate term Treasuries are called Treasury notes (two year, three year, five year, seven year and ten year); longer term Treasuries are called Treasury bonds (30 years).
Treasury bills are non-interest-bearing. Instead, they are bought at a discount to face value (par) and investors are paid the face value when the bills mature.
Treasury notes and bonds pay interest on a semi-annual basis. The principal is paid back when the note or bond matures.
A short-term government bond fund will invest in Treasury bills and/or Treasury notes with a 2-3 year maturity, as well as short-term obligations of federal government agencies.
One major characteristic of short-term government bonds is that they usually have lower interest rate risk than intermediate- or long-term bonds. That’s because the shorter maturities translate to a lower risk of your bonds going down in price if interest rates rise.
Keep in mind that risk and yield typically go hand-in-hand in the bond market. So, in general, lower-risk bond funds of all types will often have lower yields than bond funds with higher-risk bonds with longer maturities.
Why Invest in Short-Term Government Bond Funds?
The interest generated by short-term government securities is typically higher than the rates on a bank savings account or a money market account. That makes them a good first step for highly risk-averse investors.
However, although the securities held by a short-term government bond fund might be safe, the fund itself is not insured by the Federal Deposit Insurance Corp., like banks are, or any other federal agency.
The share price of the fund is not guaranteed by the U.S. government and can fluctuate. Rising interest rates and inflation can adversely affect the value of short-term government bond funds. Although price fluctuations for short-term government bond funds are typically slight, it is possible to lose money.
In simple terms, a short-term government bond fund seeks to provide investors with current income while experiencing only modest price fluctuations in the price of the fund.
However, one key feature of short-term bonds, including short-term government securities, is that they are highly sensitive to expectations for interest rates.
So if market participants expect the Fed to raise interest rates in order to combat inflation, then the yields on shorter maturity bonds (such as a 2-year Treasury note) will quickly rise to meet those expectations.
For example, in early 2022, the yield on a 2-year Treasury note went from below 1% to about 2.5% in a few months.
The end result is a drop in the share price of the bond fund, although its drop will be less than that for government bond funds holding longer maturity bonds. That makes for a better ratio of return for the risk taken.
In summary, all bonds carry interest rate risks as well as the risk of rising inflation. However, short-term government bond funds minimize these risks because they hold securities that mature in 2-3 years or less.
How to Invest in Short-Term Government Bond Funds
All Treasuries can be purchased directly online at the U.S. government’s own website: www.treasurydirect.gov. They can be bought in very affordable denominations of $100.
However, to instantly gain access to a broad portfolio of Treasury securities, a short-term government bond fund is the preferred route.
Like stocks, short term government bonds are highly liquid. But they serve a different role in your portfolio. They are best used as a way to keep money liquid and secure, while getting a better rate of return than a bank or money market can offer.
So if you count yourself among those investors who need to prioritize capital preservation, short-term government bond funds may be the right answer for you.
To help in your search for short-term government bond funds, check out www.magnifi.com. You just type in a term like “short-term government bond funds for retirement income” and instantly get relevant, tailored results without having to run screeners or charts.
Unlock a World of Investing
with a Magnifi Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as April 8, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.