Hi, I'm Nick Tripodes, Portfolio Manager and Senior Investment Analyst at Federated Investors.
Why are investors so interested in ultrashorts?
I think it allows investors to take a step out on the yield curve. Instead of being in a very short investment, they can extend a little bit, go a little bit further on the yield curve, pick up a little incremental income and a little additional yield. So that provides investors opportunity to maybe take money they don't need for six months or 12 months and get that extra yield, extra income, and help with their, whether it's a project for a government agency or an institution or if an investor's saving money for a house, it allows them to get a little bit extra pick-up.
In addition, on the other side, if an investor is invested in a longer term, intermediate, or a longer term bond fund, and they wanna take a little risk off the table, a little interest rate risk, they can shorten their position. Also, if investors are taking money out of the stock market, or something that earned them a lot of money but they wanna just get a little bit more conservative, it allows them to invest in a ultrashort product to still get a return, but take some risk off the table. So, in general, ultrashort products allow investors to access credit markets, whether it's investment-grade corporates or asset-back securities, along with treasuries, mortgages, and agencies while reducing interest rate risk by keeping that short duration space.
What types of risks are associated with ultrashorts?
The two main risks are interest rate risk and credit risk. So interest rate risk is really the sensitivity to a rise or fall in interest rates. So if you have a rapid rise in interest rates that could have a negative impact on prices. That really is a risk that's associated with all fixed income investing, but ultrashorts have a little bit lower interest rate risk just because they're usually less than a year average life. The other risk is credit risk. So if you're buying a corporate, investment-grade corporate bond, or asset-back securities, there's underlying credit risk associated with that. But we do have a team of analysts that makes recommendations based on our different credit risk assessments.
Views are as of October 21, 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 these securities and portfolios will fluctuate in value. Some money market funds attempt to maintain a stable net asset value. Duration is a measure of a securitys price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations. Federated Investment Management Company 19-10142 (10/19)