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The Intermediate-Term Bond Category Is a Big Tent

Know what to expect from your intermediate-term bond fund.

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As the third-largest U.S. fund category, the intermediate-term bond Morningstar Category sprawls across more than 300 funds and counts $1.4 trillion in assets. The size of the group reflects the essential role that intermediate-term bond funds often play in investor portfolios. Funds in this category invest primarily in investment-grade bonds and keep their durations--a measure of interest-rate sensitivity--in the intermediate-term range. They offer a moderate dose of interest-rate risk and should hold up reasonably well when equity markets suffer losses driven by other factors.

That said, this group is diverse. Some funds in the category hew closely to the investment-grade-only Bloomberg Barclays U.S. Aggregate Bond Index. They often hold large stakes in U.S. Treasuries and agency mortgages as well as investment-grade corporates. Other more adventurous funds take on an extra helping of credit risk, investing meaningfully in junk bonds and/or leveraged bank loans. Some of these funds also venture abroad to buy the debt of developed- and developing-markets countries or companies that issue in these markets; a subset adds exposure to non-U.S. currencies to the mix. Meanwhile, a smaller subgroup invests the bulk of its assets in mortgage-backed and other securitized debt, sectors that include government-backed agency fare as well as private-label debt that can expose investors to losses if borrowers don't pay their loans on time.

Sarah Bush does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.