October 29 brings the conclusion of another two-day meeting of the Federal Open Market Committee (FOMC). The consensus wisdom indicates the Fed will pare interest rates again by at least 25 basis points.
Dovish moves by the U.S. central bank often prompt fixed income investors to examine longer-dated bonds on the basis that those issues are more sensitive to rate movements. That sensitivity is true and well-documented. But it shouldn’t diminish the ongoing utility of shorter duration ETFs such as the Neuberger Berman Short Duration Income ETF (NBSD ).
The actively managed NBSD turned a year old in ETF form in June. Prior to that, it was launched as an open-end mutual fund in 1986. Translation: NBSD has been around and delivered for investors across essentially every interest rate climate imaginable.
NBSD, Short Duration Still Alluring
The ETF is home to 727 mostly invest-grade bonds spanning corporates and U.S. agency mortgage-backed securities. It sports a weighted average duration of just 2.08 years. But that doesn’t crimp the ETF’s income potency, as highlighted by a 30-day SEC yield of 5.01%. That could make the ETF an attractive alternative to cash as interest rates decline.
“With central bank rates declining, the yield available on cash is also reducing. Short duration bonds, with potentially higher returns than cash, lower volatility and a naturally liquid profile, could be an interesting option for investors,” noted Axa Investment Managers.
Short duration bonds, including those residing in NBSD, can also benefit fixed income investors in terms of reduced volatility and solid returns. Neither of those should be overlooked even if the Fed eases rates.
“After the large bond sell off in 2022, many investors have been reconsidering their longer dated bond portfolio. Instead, they have been looking at short duration which, given their characteristics, offer a potential safe haven during volatile markets,” observed Axa. “Yield curves have steepened recently however this has been accompanied by a sharp increase in volatility seen in longer-dated yields. This volatility more than offsets the small yield premium received from investing at the longer-end, highlighting the stronger risk-adjusted potential at the shorter end.”
NBSD is pertinent for another reason. The ETF and its holdings could provide advisors and investors with clues about the Fed’s intentions.
“Short duration bonds also tend to reflect the interest rate policies of central banks. Central banks usually provide guidance about what their next policy moves are going to be meaning there are less shocks. This results in more stability for yields as we have more visibility on what to expect,” concluded Axa.
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