Hi, I'm Randy Bauer, Senior Portfolio Manager at Federated Investors.
What features do ultrashort bonds highlight?
Ultrashort bonds are usually those of the duration that is interest rate risk or effective maturity a year or less. Portfolio of ultrashort-type bonds would generally be of high quality and would offer an investor a portfolio that has limited volatility. That is, limited movement of price up and down, and perhaps would have a yield that would exceed that available in a cash investment, like a money market portfolio.
What impact would a Federal Reserve rate cut have on ultrashort bonds?
Well, the Fed can cut rates and it will generally lower the available yield on any short-term investment that is in any way tied to that Fed fund's rate cut. But an ultrashort portfolio would probably maintain the level of yield a little better than a money market portfolio, and the reason that would happen is because the average maturity of the bonds in that portfolio are a little bit longer than those that you'd find in a money market portfolio and as a result it would take longer for the yields on all those securities to reset to a lower level. So it's likely that your yield would be maintained longer than if you were invested in a money market portfolio.
What is the case for ultrashort bonds across varying rate and market environments?
Well depending on one's investment objectives an ultrashort portfolio could be appropriate for anyone at any time. And give the example of someone who's a very risk-averse investor, doesn't want to take a lot of interest rate risk, if they feel that yields are going up, market yields are going up, they might reduce the amount of interest rate they're taking by moving from an intermediate or a long-term bond fund into a short-term bond fund or an ultrashort-type product. You might also, if you wanted to gain more current yield, then you would get in a money market portfolio, you could move out the yield curve a little bit to that short interest rate risk, short-duration product that you would see in the ultrashort area. If interest rates were going down, once again, if the Fed cuts rates you may be able to maintain your yield a little bit longer than you would in a money market portfolio.
Views are as of July 15, 2019, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Ultrashort bonds and portfolios of ultrashort bonds are not money market securities and portfolios of these securities will fluctuate in value. Some money market mutual funds attempt to maintain a stable net asset value through compliance with relevant Securities and Exchange Commission (SEC) rules. Federated Investment Management Company 19-10102 (7/19)