WSJ: Pros and Cons of Ultra-Short-Term Bond Funds

Tuesday, 12 Aug 2014 11:13 AM

By Dan Weil

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Ultra-short-term bond funds offer investors higher yields than do most money market funds, without requiring you to lock up your money like you would with a certificate of deposit or to take the same interest-rate risk that you would with a long-term bond fund.

The ultra-short-term funds have an average yield of 0.7 percent, according to The Wall Street Journal.

But the share prices of ultra-short-term bond funds will still suffer when the Federal Reserve raises interest rates, experts tell the paper. Many economists expect the Fed to do so in the second or third quarter of next year.

Editor’s Note:
5 Shocking Reasons the Dow Will Hit 60,000


Nonetheless, investors are buying ultras-short bond funds now and asking questions later. In the first half of the year, these mutual funds saw a $2.5 billion inflow, according to Morningstar. The funds generally hold debt with a maturity of up to a year.

As for the danger, "the risk is that people think they're taking even less risk [than they really are] for these pretty measly yields," Sarah Bush, an analyst at Morningstar, tells The Journal. "These are not money market funds. You could see modest losses."

As for long-term interest rates, 10-year Treasury yields have slid to a one-year low recently, as traders and investors seek a safe haven from the turmoil in the Mideast and Ukraine.

"The geopolitical environment has really overwhelmed everything else," Christopher Sullivan, chief investment officer at United Nations Federal Credit Union, tells Bloomberg. "These problems are . . . likely to be here for some time, and that has sent investors looking for safety."

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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