Positioning Ultrashort, Short, and Intermediate Bonds as Alternatives to Money Markets

Positioning Ultrashort, Short, and Intermediate Bonds as Alternatives to Money Markets

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Published May 13, 2024
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Welcome to the Asset Management Pulse by YCharts. Today, we’re looking at the performance of ultrashort, short, and intermediate bond funds vs money market funds after rates peaked and how that fits into today’s environment.

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With historically high yields across ultrashort, short, and intermediate-term bonds, asset managers have a unique opportunity to present their bond funds as superior alternatives to money market funds.

Merrill Lynch’s April 29th Capital Market Outlook forecasted that the Federal Reserve’s terminal rate would be 5.13% by the end of the year, suggesting just one quarter-basis-point rate cut in 2024, in other words — higher for longer.

With inflation hotter than expected in March, the Treasury market started to reflect a 'higher for longer' interest rate environment. As of April 30, the 3-month, 2-year, and 10-year Treasury yields stood at 5.46%, 5.04%, and 4.69%, respectively—well above their 10- and 20-year averages.

Three-line charts depicting a 20-year lookback at 3-month, 2-year, and 10-year Treasury rates. The 3-month Treasury rate is at 5.46%, nearing its 5.63% peak, well above the 20-year average of 1.53%. The 2-year Treasury rate is at 5.04%, just below its peak of 5.29%, and above the 20-year average of 1.86%. The 10-year Treasury rate is at 4.69%, below its peak of 5.26%, but still significantly above the 20-year average of 2.91%. Data range: April 30, 2004 - April 30, 2024. Source: Department of the Treasury.

Given that $92B flowed out of money market funds in March 2024, investors may already be seeking better yield opportunities.

Merrill’s Chief Investment Office also maintained an overweight position in U.S. Treasuries and corporates. Asset managers should leverage this environment to encourage advisors to extend duration and consider ultrashort, short and intermediate-term bond funds. Below are some helpful visuals to aid those conversations. 

Ultrashort Bond Fund Performances Following Yield Peaks in 2023

Starting with ultrashort-term bond funds, defined as funds with an effective maturity of less than one year, the 3-month Treasury rate ended April 2024 at 5.46%, just 17 basis points lower than its 5.63% peak on October 6, 2023.

Using the YCharts Fund Screener, we identified 50 funds with an effective maturity of less than one year.

From October 6, 2023 to April 30, 2024, the average total return for these ultrashort-term bond funds was 3.38%. This outperformed the largest money market fund (by AUM), Fidelity Government Money Market (SPAXX), by 54 basis points. Click here to add your fund to the chart below. 

Two-line charts comparing ultrashort bond fund returns against the largest money market fund since the 3-month Treasury rate peaked in 2023. The top chart shows the total returns of ultrashort bond funds versus Fidelity Government Money Market Fund (SPAXX). Notable fund performances include DFA Short-Duration Real Return (4.57%), Western Asset Ultra-Short Income (4.20%), Victory Ultra Short-Term Bond (4.05%), CrossingBridge Ultra-Short Duration (3.86%), and Fidelity Government MMkt (2.84%). The bottom chart illustrates the NAV % change for each fund. The 3-month Treasury rate is shown at 5.46%, 17 basis points below its 5.63% peak on October 6, 2023. Date Range: October 6, 2023 - April 30, 2024. Source: Department of the Treasury

Here are some of the best-performing funds on a total return basis from the 3-month’s peak on October 6, 2023 through April 30, 2024. Get in touch with YCharts or save this fund screen to access the full list.

Table showing the top-performing ultrashort bond funds since the 3-month Treasury rate peaked in 2023 (October 6, 2023) through April 30, 2024. Key columns include effective duration, effective maturity, distribution yield (TTM), total return, and NAV return since the rate peak. Top performers: PIMCO Low Duration Opportunities I-2 (PUTPX) with a total return of 5.64% and NAV return of 3.40%; DFA Short-Duration Real Return Instl (DFAIX) with a total return of 4.57% and NAV return of 0.86%; Western Asset Ultra-Short Income I (SBAYX) with a total return of 4.20% and NAV return of 1.93%; Victory Ultra Short-Term Bond (UUSTX) with a total return of 4.05% and NAV return of 1.01%; CrossingBridge Ultra-Short Duration Instl (CBUDX) with a total return of 3.86% and NAV return of 0.38%. Source: YCharts

Short-Term Bond Fund Performances Following Yield Peaks in 2023

For short-term bond funds, defined as funds with an effective maturity between 1 and 3 years, the 2-year Treasury rate ended April 2024 at 5.04%, just 15 basis points lower than its 5.19% peak reached on October 18, 2023.

Using the YCharts Fund Screener, we identified 145 funds with an effective maturity between 1 and 3 years.

From October 18, 2023, to April 30, 2024, the average total return for these short-term bond funds was 3.83%, outperforming SPAXX by 116 basis points. Click here to add your fund to the chart below. 

Two-line charts comparing short bond fund returns versus the largest money market fund since the 2-year Treasury rate peaked in 2023. The top chart shows the total returns of short bond funds versus Fidelity Government Money Market Fund (SPAXX). Notable fund performances include Virtus Newfleet Multi-Sector S/T Bd I (5.43%), Western Asset Short Duration Inc ETF (5.21%), VictoryShares Short-Term Bond ETF (5.05%), and Columbia Short Term Bond Inst (4.96%), compared to Fidelity Government MMkt (2.67%). The bottom chart illustrates the NAV % change for each fund. The 2-year Treasury rate is shown at 5.04%, 15 basis points below its 5.19% peak on October 18, 2023. Date Range: October 18, 2023 - April 30, 2024. Source: Department of the Treasury.

Here are some of the best-performing funds on a total return basis from October 18, 2023 to April 30, 2024. Get in touch with YCharts or save this fund screen to access the full list.

Table showing the top-performing short bond funds since the 2-year Treasury rate peaked in 2023 (October 18, 2023) through April 30, 2024. Key columns include effective duration, effective maturity, distribution yield (TTM), total return, and NAV return since the rate peak. Top performers: American Century Zero Coupon 2025 Inv (BTTRX) with a total return of 11.67% and NAV return of 7.33%; Overlay Shares Short Term Bond ETF (OVT) with a total return of 6.81% and NAV return of 3.67%; PIMCO Low Duration Income I2 (PFTPX) with a total return of 6.37% and NAV return of 3.66%; Virtus Newfleet Multi-Sector S/T Bd I (PIMSX) with a total return of 5.43% and NAV return of 2.77%; and MassMutual Short-Duration Bd L (BXDLX) with a total return of 5.32% and NAV return of 3.37%. Source: YCharts.

Intermediate-Term Bond Fund Performances Following Yield Peaks in 2023

For intermediate-term bond funds, defined as funds with an effective maturity between 3 and 10 years, the 10-Year Treasury rate ended April 2024 at 4.69%, just 29 basis points lower than its 4.98% peak reached on October 19, 2023.

Using the Fund Screener in YCharts, we identified 272 funds with an effective maturity between 3 and 10 years.

From October 19, 2023, to April 30, 2024, the average total return for these funds was 6.08%, outperforming SPAXX by 342 basis points. Click here to add your fund to the chart below. 

Two-line charts comparing intermediate bond fund returns versus the largest money market fund since the 10-year Treasury rate peaked in 2023. The top chart shows the total returns of intermediate bond funds versus Fidelity Government Money Market Fund (SPAXX). Notable fund performances include MainStay MacKay Total Return Bond R6 (8.99%), AST PGIM Fixed Income Central Portfolio (8.30%), Eaton Vance Total Return Bond I (8.01%), Western Asset Mortgage Total Return A (7.89%), and MassMutual Diversified Bond R5 (7.66%), compared to Fidelity Government MMkt (2.66%). The bottom chart illustrates the NAV % change for each fund. The 10-year Treasury rate is shown at 4.69%, 29 basis points below its 4.98% peak on October 19, 2023. Date Range: October 19, 2023 - April 30, 2024. Source: Department of the Treasury.

Here are some of the best-performing funds on a total return basis from October 19, 2023 to April 30, 2024. Get in touch with YCharts or save this fund screen to access the full list.

Table showing the top-performing intermediate bond funds since the 10-year Treasury rate peaked in 2023 (October 19, 2023) through April 30, 2024. Key columns include effective duration, effective maturity, distribution yield (TTM), total return, and NAV return since the rate peak. Top performers: MainStay MacKay Total Return Bond R6 (MTRDX) with a total return of 8.99% and NAV return of 5.77%; AST PGIM Fixed Income Central Portfolio (F00001E3A1) with a total return of 8.30% and NAV return of 8.30%; Overlay Shares Core Bond ETF (OVB) with a total return of 8.10% and NAV return of 5.22%; Eaton Vance Total Return Bond I (EIBAX) with a total return of 8.01% and NAV return of 4.81%; and Western Asset Mortgage Total Ret A (SGVAX) with a total return of 7.89% and NAV return of 5.15%. Source: YCharts.

Historical Context for Yield Peaks

Rates across the yield curve look attractive compared to contemporary examples, mainly because we have been in a ZIRP era since the global financial crisis. Therefore, there aren't many comparable periods to look at over the past twenty years. 

But, there is one.

In April 2006, the 10-year treasury rate exceeded 5%; rates peaked at 5.25% by June. The 2-year rate peaked at 5.29%, and the 3-month rate exceeded 5% around the same time. 

Three-line charts depicting a lookback at 3-month, 2-year, and 10-year Treasury rates from 2006 to 2009. The 3-month Treasury rate peaked at 5.19% in July 2006 before declining to 0.10% by January 2009, with a 3-month average of 3.14%. The 2-year Treasury rate peaked at 5.29% in June 2006 and fell to 0.99% by January 2009, with a 2-year average of 3.34%. The 10-year Treasury rate peaked at 5.26% in June 2006, dropping to 3.03% by April 2009, with a 10-year average of 4.17%. Date Range: April 25, 2006 - April 24, 2009. Source: Department of the Treasury.

Recently, funds focused on the ultrashort-to-intermediate part of the yield curve produced better returns for investors after rates ascended.

Across the 564 intermediate bond funds screened on YCharts, the average three-year total return was 17.18%, 683 basis points higher than SPAXX’s 10.35% return over the same period. Click here to add your fund to the chart below.

Two-line charts comparing intermediate bond fund returns versus the largest money market fund after the 10-year Treasury rate peaked in June 2006. The top chart shows the total returns of intermediate bond funds versus Fidelity Government Money Market Fund (SPAXX). Notable fund performances include Calvert Core Bond I (29.70%), PGIM Core Bond R6 (29.02%), T. Rowe Price US Treasury Interm Idx (28.38%), and Vanguard Interm-Term Treasury Adm (27.91%), compared to Fidelity Government MMkt (10.35%). The bottom chart illustrates the NAV % change for each fund. The 10-year Treasury rate is shown at 3.51%, down from its 5.26% peak in June 2006, with a 10-year average of 4.07%. Date Range: June 28, 2006 - June 29, 2009. Source: Department of the Treasury.

Here’s a list of best-performing intermediate bond funds across various forward-looking time periods after rates peaked in June 2006. Get in touch with YCharts or save this fund screen to access the full list.

Table showing the top-performing intermediate bond funds after the 10-year Treasury rate peaked in 2006 (June 28, 2006). Key columns include 3-month, 6-month, 1-year, 18-month, 2-year, and 3-year total returns after the 10-year rate peak. Top performers include Calvert Core Bond I (CLDIX) with a 3-year total return of 29.70%, PGIM Core Bond R6 (TPCQX) with a 3-year total return of 29.02%, PIMCO Total Return II Instl (PMBIX) with a 3-year total return of 28.70%, PIMCO Total Return Instl (PTTRX) with a 3-year total return of 28.62%, and T. Rowe Price US Treasury Interm Idx (PRTIX) with a 3-year total return of 28.38%. The average 3-year total return across all funds is 17.18%. Source: YCharts.

Across the 263 short bond funds screened on YCharts, the average three-year total return was 14.05%, 370 basis points higher than SPAXX’s 10.35% return over the same period. Click here to add your fund to the chart below.

Two-line charts comparing short bond fund returns versus the largest money market fund after the 2-year Treasury rate peaked in June 2006. The top chart shows the total returns of short bond funds versus Fidelity Government Money Market Fund (SPAXX). Notable fund performances include CM Advisors Fixed Income Total Return (31.24%), American Century Zero Coupon 2025 Inv (25.17%), Federated Hermes Short-Interm Govt IS Total Return (24.48%), Thompson Bond Total Return (24.33%), and MainStay Short Term Bond I Total Return (22.81%), compared to Fidelity Government MMkt (10.35%). The bottom chart illustrates the NAV % change for each fund. The 2-year Treasury rate is shown at 1.11%, down from its 5.29% peak in June 2006, with a 2-year average of 3.11%. Date Range: June 28, 2006 - June 29, 2009. Source: Department of the Treasury.

Here’s a list of best-performing short bond funds across various forward-looking time periods after rates peaked in June 2006. Get in touch with YCharts or save this fund screen to access the full list. 

Table showing the top-performing short bond funds after the 2-year Treasury rate peaked in 2006 (June 28, 2006). Key columns include 3-month, 6-month, 1-year, 18-month, 2-year, and 3-year total returns after the 2-year rate peak. Top performers include CM Advisors Fixed Income (CMFIX) with a 3-year total return of 31.24%, American Century Zero Coupon 2025 Inv (BTTRX) with a 3-year total return of 25.17%, Federated Hermes Short-Interm Govt IS (FIGTX) with a 3-year total return of 24.48%, Thompson Bond (THOPX) with a 3-year total return of 24.33%, and MainStay Short Term Bond I (MIXIX) with a 3-year total return of 22.81%. The average 3-year total return across all funds is 14.05%. Source: YCharts.

Across the 147 ultrashort bond funds screened on YCharts, the average three-year total return was 7.75%, 260 basis points lower than SPAXX’s 10.35% return over the same period. Clilck here to add your fund to the chart below.

Two-line charts comparing ultrashort bond fund returns versus the largest money market fund after the 3-month Treasury rate reached 5% in June 2006. The top chart shows the total returns of ultrashort bond funds versus Fidelity Government Money Market Fund (SPAXX). Notable fund performances include Virtus Seix US Govt Secs Ultr-Shrt Bd I (16.78%), DFA Two-Year Government Institutional Total Return (14.23%), DFA One-Year Fixed-Income I Total Return (13.79%), and Allspring Adjustable Rate Govt Inst Total Return (12.31%), compared to Fidelity Government MMkt (10.35%). The bottom chart illustrates the NAV % change for each fund. The 3-month Treasury rate is shown at 0.20%, down from its 5.19% peak in June 2006, with a 3-month average of 2.86%. Date Range: June 28, 2006 - June 29, 2009. Source: Department of the Treasury.

Here’s a list of best-performing ultrashort bond funds across various forward-looking time periods after rates exceeded 5% in June 2006. Get in touch with YCharts or save this fund screen to access the full list.

Table showing the top-performing ultrashort bond funds after the 3-month Treasury rate reached 5% in 2006 (June 28, 2006). Key columns include 3-month, 6-month, 1-year, 18-month, 2-year, and 3-year total returns after the 3-month rate peak. Virtus Seix US Govt Secs Ultr-Shrt Bd I (SIGVX) achieved a 3-year total return of 16.78%, BBH Limited Duration I (BBBIX) had a 3-year total return of 16.31%, DFA Two-Year Government Institutional (DFYGX) had a 3-year total return of 14.23%, PIA Short Term Securities Adv (PIASX) had a 3-year total return of 14.08%, and DFA One-Year Fixed-Income I (DFIIHX) had a 3-year total return of 13.79%. The average 3-year total return across all funds is 7.72%. Source: YCharts.

This performance highlights that extending duration even slightly when rates are elevated can result in higher returns for clients due to participation in price appreciation from the underlying bonds.

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