A case for short- and intermediate-maturity bond funds
Shorter-term bond strategies present an attractive risk/reward opportunity, says Fidelity’s Rob Galusza.
- In recent years, short- and intermediate-term bond funds – portfolios investing in debt securities with a maturity of one month to 10 years – have enjoyed a sizable performance advantage over longer-term bond strategies, according to Fidelity Portfolio Manager Rob Galusza, who also is drawn to these comparatively short-term securities for what he considers compelling long-term attributes.
- “Short- and intermediate-term bond funds have had a nice run, and we believe that, in all markets, they offer a compelling mix of characteristics, including performance comparable to diversified (core) investment-grade bond funds, but with lower risk,” says Galusza, who co-manages Fidelity Advisor® Short Term Bond Fund, Fidelity Advisor® Limited Term Bond Fund, Fidelity® Limited Term Bond ETF, Fidelity® Intermediate Bond Fund and other portfolios, along with Julian Potenza, David DeBiase and John Mistovich. This team, plus Maura Walsh, also co-manages Fidelity Advisor® Conservative Income Bond Fund.
- In helming these strategies, the managers concentrate on areas where they believe they can repeatedly add value, including asset allocation, sector and security selection, yield-curve positioning and opportunistic trading.
- Galusza acknowledges that the recent outperformance of shorter-duration bond funds has been aided by a unique set of circumstances. In the bear market of 2022, the U.S. Federal Reserve tightened monetary policy by raising its policy interest by four percentage points, from near zero to a range of 4.25% to 4.5%. The Fed then raised its benchmark rate another 100 basis points in 2023 before stopping, then pivoted to lowering rates in mid-September 2024.
- This resulted in the bond yield curve becoming notably inverted from roughly 2022 to 2024. Galusza explains that short-term bond issues yielded a better interest rate than longer-term bonds, the opposite of a “normal” curve, which reflects a more customary bond market in which investors receive a premium rate as an incentive to invest for longer periods.
- During this period, because bond prices usually move inversely to yields, there was much greater price depreciation in long-maturity securities. In 2022, for example, Fidelity® Short Term Bond Fund returned -3.62%, versus -13.01% for the Bloomberg U.S. Aggregate Bond Index, the latter’s worst-ever calendar-year result. Meanwhile, the 10+ year component of the index returned -27.12%.
- Looking at the past three years through June 30, 2025, the fund gained an average of 4.32% per year, versus 2.55% for the Aggregate index, a significant period of outperformance.
- “Those were unique circumstances that tend to smooth out over time,” he says. “But even when we look at a longer period, short- and intermediate-term bond funds have offered attractive returns with lower return volatility, relative to core bond strategies.”
- The portfolio management team recently wrote a white paper that studied this topic, noting that from 2012 through 2024, short- and intermediate-maturity investment-grade debt funds generated 88% of the return of longer-term core bonds, on average, with 52% less volatility.
- This is because the comparatively shorter-term securities in which short and intermediate bond funds invest have shown lower sensitivity to interest rates and spreads over time, Galusza notes.
- “So, for investors looking to add more fixed income to a stock-heavy portfolio, or to diversify within fixed income,” Galusza concludes, “short and intermediate bond funds have shown they can offer broadly similar returns to a core bond fund but with significantly lower risk.”
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