Skip to Content

2 Ultrashort Bond Funds That Benefit From an Inverted Yield Curve

These bond funds can provide downside protection in periods of credit stress.

Artwork of markets going up and down
Securities In This Article
PIMCO Short-Term A
PIMCO Total Return Instl
Fidelity Conservative Income Bond
Fidelity Total Bond Fund

After spending years in the wilderness of low interest rates, fixed-income investors no longer have to stretch to find yield. An inverted yield curve means that ultrashort bond funds are now yielding almost as much as longer-dated bond funds without the interest-rate risk, presenting an attractive opportunity for income investors.

The rapid rise in rates since March 2022 has raised the yield on shorter-term Treasuries relative to the yield on longer Treasuries. As of the end of August 2023, the three-month Treasury yield is over 5.0% and the 10-year Treasury yield is 4.1%, illuminating investors’ appetite for risk against the current economic backdrop. Treasury yields provide context for the dramatic increase that SEC yields have also experienced recently. The median SEC yield in the ultrashort bond Morningstar Category is 5.2%, compared with 4.7% for the intermediate core-plus bond category.

While ultrashort bond funds are yielding almost as much if not more than their core-plus bond counterparts with a fraction of the duration risk, they could be worth a look. These conservative funds can also provide some downside protection during periods of stress in credit markets. Let’s explore two ultrashort bond funds that look attractive.

Designed for investors seeking a dynamic option for cash management, Fidelity Conservative Income Bond FCNVX is more risk-conscious than most peers within the ultrashort bond category. The strategy favors higher-quality corporate fare, but this has not compromised its current 5.3% SEC yield. This is only slightly less than the yield of Fidelity Total Bond FTBFX, which has a longer duration and includes more credit-sensitive sectors such as high-yield corporate bonds and emerging-markets debt. Fidelity Conservative Income Bond’s 1.4% trailing 10-year annualized gain beat most of its peers through the end of July, and its shorter-than-average duration in its category led to a top-quartile 1.3% return in 2022.

Pimco Short-Term PSHAX is another compelling option in the ultrashort bond category that takes a more flexible approach. The strategy builds a diversified portfolio with core allocations of investment-grade credit, securitized debt, and U.S. Treasuries, and it complements these with smaller positions in high-yield bonds, non-U.S. debt, and foreign currencies when it makes sense. Its current SEC yield of nearly 5% matches intermediate core-plus bond offering Pimco Total Return’s PTTRX. This approach has led to a top-quartile 1.6% annualized trailing 10-year return for Pimco Short-Term, but its willingness to take risk can result in a bumpier ride at times than its typical ultrashort bond peer, exemplified by its slight loss in 2022.

Comparing the SEC yield of intermediate core-plus bond and ultrashort bond funds shows that yields across fixed income look appealing right now. But for income investors who are worried about duration risk, ultrashort bond strategies present an interesting opportunity and can also provide downside protection in periods of credit stress.

A version of this article was published in the July 2023 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

3 Great Bond ETFs

Solid core options to anchor your portfolio.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

Sponsor Center