Morningstar’s best short-term bond funds amid yield inversions


With interest rates soaring this year, you may be considering a foray into the bond market. If you’re getting started, one decision you’ll need to make is whether to go for short-term or long-term bonds.

There’s a good case to be made now for short-dated bonds, as they offer higher yields than longer-dated bonds. The official term for this dynamic is an “inverted yield curve”.

As of July 19, one-year treasury bills yielded 3.14%, three-year treasury bills at 3.23%, five-year treasury bills at 3.16% and 10-year treasury bills at 3.01%. There is therefore no compelling reason to go beyond the three-year deadlines.

Less risky

Short-term bonds carry less risk than long-term bonds because with short-term bonds there is less time for something to go wrong with the issuers. That’s not really a concern for Treasuries, where the issuer is the US government. But that’s for corporate bonds.

Also, short-term bonds will obviously get your money back to you faster. This could help if an unforeseen spending need arises.

If you’re going to go with bond funds, Morningstar notes that it’s important to choose one with low fees. The company has compiled a list of the top four exchange-traded funds and short-term mutual funds. They all have Morningstar’s highest gold rating.

1. Baird Short Term Bond BSBIX

“The team’s pragmatic approach focuses on higher quality corporates, high quality securitized credit and government bonds,” Morningstar analyst Gabriel Denis wrote in a commentary.

Managers “keep the duration of the strategy [a measure of interest-rate sensitivity] in line with that of the Bloomberg US Government/Credit 1-3 Year Index,” he said. The process forgoes leverage, derivatives and macro trading,… focusing on security selection and sector rotation.

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2. PGIM short-term corporate bond PSTQX

“The strategy is atypical for a short-term bond offering,” Morningstar analyst Eric Jacobson wrote in a commentary.

“It has generally maintained its duration between 2.6 and 2.8 years, but that may seem long for the peer group, which has recently averaged around 2 years.

Furthermore, “it places an unusual emphasis on corporate debt – and greater exposure associated with A and BBB issues,” Jacobson said.

3. Vanguard Short Term Corporate Bonds. FCP: VSTBX, ETF: VCSH

“Strictly focusing on corporate bonds should position this fund to capture market rallies better than most of its peers in the Morningstar category without pushing it too far into risky territory,” Morningstar analyst Lan Anh wrote. Tran in a comment.

“The majority of its assets are invested in A or BBB-rated bonds, while its peers may load instead in AAA-rated government bonds.”

4. Vanguard Short Term Cash. FCP: VSBSX, ETF: VGSH

“This is a conservative portfolio with minimal credit risk, as the Treasuries are backed by the full confidence and credit of [the] US government,” Morningstar analyst Neal Kosciulek wrote in a commentary.

“Interest rate risk is the main driver of its performance, but given its focus on bonds at the short end of the yield curve, even that is muted.”


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