Keeping it Short With Bonds is Paying Off

By Todd Shriber for Iris.xyz

Reacting to rising interest rates, fixed income investors often shift to lower duration bonds and the related funds, a move that has been on full display this year. Of the two fixed income exchange traded funds (ETFs) that are among this year’s top 10 asset-gathering ETFs, both are low or ultra-low duration products.

Compounding concerns in the corporate bond market are the rising number of bonds with BBB ratings, meaning those issues sit one to three rungs away from junk territory. By some estimates, half the U.S. investment-grade bond market has a BBB rating of some kind. If a spate of downgrades ensues, investors, fund managers restricted to owning investment-grade debt will be forced to depart those fallen angels, pressuring the high-yield bond market along the way.

There are no guarantees those downgrades will happen, but price action confirms JPST has been a better bet this year than the largest investment-grade and high-yield bond ETFs.

Corporate bonds, though prized for income-generating traits, can increase a fixed income portfolio’s volatility whereas a an ultra-low duration strategy like JPST can reduce a portfolio’s overall volatility.

While short-term bonds are not likely to keep pace with equity returns over long holding periods, current yields on funds such as the JPMorgan Ultra-Short Income ETF (JPST) have these products positioned to be sources of refuge for investors in what could be an increasingly stormy environment for bonds.

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