Investors embrace short-term bonds like FHIS and FLSD for stability and returns in a shifting market
In an article by Wealth Professional, created in partnership with Franklin Templeton, explores the evolving bond market landscape in 2024.
With the Canadian yield curve still inverted, short-term bonds have emerged as the unexpected winners, delivering attractive yields and reduced risk compared to traditional long-term bonds.
Alex Lee, head of Canada ETF Product Strategy at Franklin Templeton Canada, explains, saying, “Many investors are surprised by how much value short-term bonds are offering right now. It’s a clear example of why we can’t rely on old assumptions about the bond market term anymore.”
Falling rates have historically boosted long-duration bonds.
However, in 2024, short-term and ultra-short-term bonds like the Franklin Canadian Ultra Short Term Bond Fund (FHIS) and the Franklin Canadian Short Term Bond Fund (FLSD) are proving more effective.
FHIS, launched in September 2022, offers a yield of 3.9 percent (as of November 30, 2024) with low volatility and a short duration of less than one year. It consistently outperforms its benchmark, the FTSE Canada 0-1 Year Universe Overall Bond Index.
“FHIS is a great option for investors who want to put their cash to work without exposing themselves to significant interest rate risk,” says Lee.
FLSD caters to investors seeking higher yields. With a yield of 4.2 percent and an effective duration of three years, FLSD balances reinvestment risk and return potential in today’s declining rate environment.
Lee describes it as a fund designed for “capturing higher yields without taking on the reinvestment risks that come with a steep drop in rates.”
Investors with long-term goals can adopt the barbell strategy, combining FHIS for stability and the Franklin Canadian Core Plus Bond Fund (FLCP) for growth.
FHIS anchors the portfolio with consistent, low-risk returns, while FLCP leverages longer-term opportunities and a competitive yield.
“This combination is about flexibility,” explains Lee. “With FHIS offering short-term stability and FLCP capturing long-term opportunities, investors can create a portfolio that’s ready for whatever comes next.”
The bond market’s unpredictability since 2022 has highlighted the need for flexibility.
Short-term bonds are now leading the way for investors transitioning out of cash, providing compelling solutions to grow returns while managing duration risk.
“The bond market has changed dramatically since 2022,” says Lee. “The key now is to stay flexible and focus on segments that deliver both value and resilience. Short-term bonds are leading the way, and smart investors are taking notice.”
