An increase in uncertainty and market volatility has many investors looking for strategies to reduce risk. We believe short-term bond strategies are attractive now, offering the potential for enhanced yield while also defending against volatile markets.
New research from Morningstar confirms that bonds have been an effective way to hedge stock market risk. “The goal is when stocks tumble, that you have something in your portfolio with the ability to at least hold its ground, or maybe even earn a little bit,” said Christine Benz, Morningstar’s director of personal finance. This is consistent with our belief that bonds are a critical component to a true diversified asset allocation.
An actively managed short-term income strategy may offer the following benefits:
- Investors seeking potential defense against volatile markets should consider short-term bonds. The short-term asset class (Treasuries, CDs, and Corporate bonds maturing within 3 years or less) can offer low duration, or limited exposure to interest rate risk, and the potential for total returns above traditional cash investments.
- Short-term bonds may offer a way to lower-volatility and minimize drawdowns during periods of market stress, compared to higher-risk assets like stocks.
- Particularly in an uncertain market, maintaining liquidity is important. Short-term bond strategies may serve as “dry powder” for future buying opportunities.
For investors seeking to manage risk amid uncertainty, a short-term bond strategy can offer a way to lower overall portfolio risk, seek to generate income, and maintain liquidity.