investing

This Short-Term Bond Fund Provides Protection From Rising Rates

Pimco Low Duration Income fund plays defense against rising rates and delivers a decent yield.

At last, short-term bonds offer respectable yields that surpass 2%—and it only took six interest-rate hikes over three years by the Federal Reserve. With more increases to come, short-term bonds have an added bonus: Their prices sink less than those of longer-dated debt when interest rates rise (bond prices and interest rates tend to move in opposite directions). That's because short-term bonds typically have a lower duration, a measure of interest-rate sensitivity, than their longer-term counterparts.

Pimco Low Duration Income (PFIAX) boasts a duration of 1.4 years. That implies the fund's value would decline by 1.4% if rates were to rise one percentage point. By contrast, the Bloomberg Barclays U.S. Aggregate Bond index has an average duration of 5.9 years.

Managers Daniel Ivascyn, Alfred Murata and Eve Tournier want to generate income and keep interest-rate sensitivity in check. They hunt for bonds with durations of three years or less and divide the portfolio into two groups: high-yield bonds that perform well in growing economies, and high-quality debt that will rally during weak economies. The managers are willing to take on more credit risk—that is, the risk that a bond issuer will default—than the average short-term bond fund. But riskier bonds must pay more to attract borrowers, and that helps to boost the fund's yield to 2.6%—more than the 2.4% yield of the typical short-term bond fund.

The fund takes its cue from Pimco's overarching view of the economy and the bond market. The current outlook is a cautious one, given the well-above-average length of the current economic recovery and pockets of the bond market looking rich compared with historical values. As a result, the fund's managers have grown more defensive recently and have added to the fund's positions in U.S. Treasuries and foreign government debt. On the high-yield side, the crew favors mortgage-backed securities that are not guaranteed by the U.S. government.

Earlier this year, Pimco converted the no-load, Class D shares of all of its mutual funds to A shares, which carry sales charges of 2.25% to 3.75%. To avoid the load, investors can purchase shares at Fidelity, Schwab or Vanguard for no load and no transaction fee.

K7I-FUNDTRENDS_RANKINGS.1.indd

Getty Images

Most Popular

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
retirement

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?

In our experience, many have saved enough money to retire comfortably. Yet too many worry about their money running out and want more. Maybe it’s tim…
May 6, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
American Century Small Cap Value (ASVIX) Joins Kip 25
Kip 25

American Century Small Cap Value (ASVIX) Joins Kip 25

American Century's small-cap-focused ASVIX consistently delivers high returns with average risk, and bears little resemblance to its benchmark.
April 30, 2021
The Disturbing Conflicts of Interest in Target Date Funds
mutual funds

The Disturbing Conflicts of Interest in Target Date Funds

Are you one of the 40 million folks who has a target date fund in your 401(k)? It could be costing you 21% in returns over the course of your career, …
April 30, 2021
The Kip 25: The Best Low-Fee Mutual Funds
mutual funds

The Kip 25: The Best Low-Fee Mutual Funds

The key to building wealth long-term is buying high-quality, low-cost mutual funds run by seasoned stock pickers. Here are our favorites: The Kiplinge…
April 29, 2021