What are short-term bonds and why should you consider them?

 

November 2022 | 2 min read   

What are short-term bonds and why should you consider them? 

Fixed income is one of the instruments that tends to be in the vast majorities of investment portfolios. Different kinds of bonds or fixed income strategies exist on the market, such as government bonds, corporate bonds, convertible bonds. Depending on their maturities, bonds can also be classified into short-term bonds (from 1 to 4 years), belly of the curve (from 5 to 10 years) and long-term bonds (with maturities between 10 and 30 years). 

Short-term bond funds seek to invest in short-term bonds of different maturities between one and four years and the funds then purchase a spectrum of financial instruments to better suit the needs of the investor or investors. 

These funds may invest in commercial papers or certificates of deposit, as well as in government bonds, amongst other securities.

What are the main features of short-term bonds?

1. Lower risks for investors
Short-term fixed income usually brings lower risks and therefore lower returns for investors. Interest rate and inflation risks might be inferior if compared to funds purchasing instruments of longer maturities. However, short-term bonds are not a risk-free investment, and the value of the instruments may decline if interest rates increase.

2. They can contribute to diversification*
Investors may wish to diversify* their portfolios and balance riskier assets with safer options such as fixed income. Bonds are usually considered a “safer” form of investment when compared to other assets such as stocks, and it is quite common that portfolios include them for this reason. Thanks to the wide range of maturities and entities, short-term bonds can contribute to diversification* of portfolios.

*Diversification does not guarantee a profit or protect against a loss

3. They are considered a liquid and conservative form of investment
Short-term bonds are considered a highly liquid form of investment. Due to the size of the markets where short-term bonds are traded, they can be more easily and quickly converted in cash. They also represent a good option for investors looking for a more conservative approach, as they have relatively less volatility, but they are not immune from risks. 

What are the main features of short-term bonds?

They could be considered as a viable investment thanks to the positive repricing of their yield curves after the end of the “great repricing” that started this year, when Central Banks in the developed markets started hiking their rates aggressively to tame inflation. Fixed income could again play the traditional role of portfolio diversification in the near future, as the situation could stabilize and lead to lower rates volatility and less uncertainty. 

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Important information

Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 22 November 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. All investors should seek professional advice prior to any investment decision, in order to determine the risks associated with the investment and its suitability. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.

Date of first use: 22 November 2022
Doc ID: 2606590