Is Now the Time for Short-Term Bonds?

The fixed-income market continues to be plagued by themes such as interest-rate volatility and low levels of global yields. How can investors maneuver around the risks inherent in these themes? Pacific Funds Short Duration Income is designed to seek current income with protection against sudden or large interest-rate changes.


Dominic Nolan: Many investors are revisiting their fixed-income allocation in light of low yield levels and rising short-term interest rates. We believe short-term corporate bond investments, as part of an overall diversified portfolio, may be an option for those either worried about rising interest rates or seeking a higher level of income compared to other short-term investments.

Historically, when compared to longer-term bonds, short-term corporate bonds have been a more effective defense against rising interest rates because their prices are less sensitive to large interest-rate movements.

Over the past 40 years (see chart at 00:38), short-term corporate bonds have provided more than 90% of the returns of intermediate-term bond with about half of the volatility.

David Weismiller: Additionally, investors can diversify risk, shifting from interest-rate risk inherent in U.S. government bonds towards credit-risk with short-term corporate bonds. Historical data indicates that investors were generally compensated for the increased risk.

As you can see (see chart at 01:02), short-term corporate bonds have historically outperformed short-term government bonds. In fact, short-term corporate bonds consistently outperformed over rolling one, three and five-year periods since 1976.

While many short-term bond funds are anchored in government securities as core investments, our focus is on corporate securities. We carefully select securities across multiple fixed-income sectors, to reflect our views on market segments and the broader interest-rate environment. We believe this approach can provide more income with less sensitivity to interest-rate movements.

Dominic Nolan: As you can see (see chart at 01:39) , Pacific Funds Short Duration Income has historically outperformed the Morningstar Category™ average return. In fact, the Fund consistently outperformed over rolling one- year and three-year periods since inception.

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