The typical short-term taxable bond fund has lost between 4% and 6% this year through September 9. Rapidly rising interest rates demanded this high cost, usurping two or more years of return. But you know it.
So here’s a question: what has been the typical growth rate of cash distributions from these funds since just before the Federal Reserve launched the interest rate change in March? The answer: 94%. The monthly payouts of the 10 largest such bond funds are riding a rocket, already nearly doubling, with more increases to come.
American funds Intermediate Bond Fund of America (FIFBX (opens in a new tab)), a short-term fund despite its name, tops the list with a 246% increase since early March. Annualizing its last monthly payment equates to a 4.2% return — around where economists and fixed-income fund managers expect the Fed to push short-term rates higher over the course of the year. next few months before pausing to assess the effects on the economy, inflation and investor sentiment .
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It’s true that a fund that returns you 4.2% but shows a total year-to-date “return” of minus 6% still doesn’t look attractive, especially next to the scale shown by my six- to 24-month certificate of deposit brokerage firm paying 3.25% to 3.50% – and I spotted this offer two weeks before the Fed’s rate hike in September.
What is likely to be the most rewarding way to exploit higher short-term interest rates once the Fed plateaus? And do managers of short-term bond and similar mutual funds and exchange-traded funds have strategies for delivering extra yield? I asked short-term bond lifers if better terms were near.
Better days for bond funds ahead
Not surprisingly, their answer is yes.
Matt Freund, chief bond strategist for Calamos Investments, says the time to stay away has come and gone. “It seems every day more that you will be paid for the risks you take,” he says.
Translated: even with higher bank savings rates, bonds and notes freshly issued or whose open market price yields between 3% and 5% are much more tempting than bonds that yielded less than 2% there at six months.
I understand that super safe CDs, treasuries and money market funds now pay a fair wage. But I can’t ignore the upward trend in fund distributions — and why it will continue for some time after the Fed stops raising rates.
There is always a lag in a fund’s interest-earning power in a rising rate environment because low-coupon items gradually mature and higher-coupon debt takes its place. I asked portfolio manager Ron Stahl at Columbia Threadneedle how long he would expect a fund like Columbia Short Duration Bond ETF (SBND (opens in a new tab)) Where Columbia Short Term Bond Fund (NSTRX) to continue increasing monthly payments after the Fed stopped climbing. He didn’t want to be stuck lest someone interpret that as a guarantee, but it could take up to four months.
Freund notes that his company’s short funds are buying high-yielding, short-term, floating-rate debt that will continue to pay more for a decent amount of time, no matter what happens with fed funds rates. You may not see your short-term fund doubling the monthly salary package throughout 2023, but your earnings should be more than capable of keeping up with the Powells and the Yellens. The immediate future is brighter for this beleaguered fund fraternity.