Category: ultrashort-bond funds

Beware ultrashort-bond funds

The reach-for-yield bubble continues to scale record heights of insanity.  The latest milestone: the recent popularity of ultrashort-bond funds.  These typically invest in high-quality bonds with maturities, on average, of less than a year.  According to a June 3 Barron’s article, “When It Comes to Cash, Less Is More“:

For the trailing one year through April 30, the nearly 50 ultrashort funds tracked by Morningstar have taken in $10 billion in new assets.  “That’s pretty big considering that there’s $52 billion in the entire category,” notes Morningstar analyst Timothy Strauts.

While this is a drop in the bucket compared to the $895 billion in retail money market funds, the vigor in which fund companies are marketing this product should raise red flags:

In the past year alone, roughly a half dozen new ultrashort-bond funds have made their debut – the BlackRock Short Obligations fund, Sterling Capital Ultra Short, and T. Rowe Price Ultra Short-Term Bond among them.  In May, Legg Mason’s subsidiary filed SEC documents for the Western Asset Ultra Short Obligations Fund.

According to Morningstar, ultrashort-bond funds have an average 30-day yield of 0.59%, but is this worth the extra risk?  During the financial crisis, many of these funds posted losses.  In fact the largest at the time, Schwab YieldPlus, lost 35% of its value in 2008.

“Our feeling on ultrashort bonds right now is ‘What’s the point,” says Jeremy Welther, a principal at Brinton Eaton, a financial advisory based in Madison, NJ.  “Any time you get back less than what you put in, it’s not cash.”

Besides gold, cash appears to be the most unloved asset class on the planet.

WordPress Themes