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Rising Rates Blog Series: the Double Appeal of Short-maturity Bonds

As yields increase, short-maturity bond funds can offer both higher income potential and a cushion against interest rate risk. Karen explains the mechanics, in part three of her Rising Rates series.One of the ways to navigate a rising rate environment is to reduce your exposure to bonds with greater levels of interest rate risk.

Rising Rates Blog Series: the Double Appeal of Short-maturity Bonds 1

For many investors, this means moving toward short-maturity bonds. In exchange for lower risk, these issues typically generate lower income than longer-maturity bonds.The current market environment is unusual, however.

A flatter yield curve means that short bonds are providing similar income to their longer-maturity counterpartswhile still reducing interest rate risk.Investors wanting to gain exposure to short-maturity bonds often do so through bond exchange traded funds (ETFs) or mutual funds, which typically hold a diversified portfolio of bonds with maturities less than five years.Perpetual bond ladderFixed-rate short-maturity bond funds tend to act like a perpetual bond ladder, especially if the fund is an index fund with a defined maturity range, such as 1- to 3-year or 1- to 5-year.

The funds portfolio manager rebalances the fund monthly, removing bonds at the low end of the maturity range and adding ones at the higher end. Over time, the portfolio adjusts to the new yield environment; as yields rise, the income increases on the portfolio.Learn more about different ways investors use bond ETFs.

Bond income can help offset price shocksThe U.S. Federal Reserve has ended its zero interest-rate policy.

Rising Rates Blog Series: the Double Appeal of Short-maturity Bonds 2

It hiked its Fed Funds target rate seven times since December 2015, from 0%-0. 25% to 1. 75%-2.

00% by June 2018. These rate increases are good news for savers as they are getting more yield on their savings. While prices on bonds have fallen over that time, rising yields have in certain cases offset those losses.

(Bond prices and yields move in opposite directions. )Too often, investors focus on the price return and forget about the INCOME portion of return in fixed income. The chart below shows the performance of various short-maturity bond indexes, which were analyzed to see how much of the total return came from bond price changes and how much came from income as rates rose.

Note that ultra-short bonds, represented by 1- to 12-month US Treasury bills (T-bills), had very little price movement while increasing the income contribution over this time period. Fixed-rate short-maturity sectors like U.S.

Treasuries and credit with 13 years to maturity both had prices losses, but increased their income as rates went up. The clear winner over this period was floating rate notes, which had positive returns for both price and income. Index performance is for illustrative purposes only.

Index performance does not reflect any management fees, transaction costs or expenses. Indexes are un-managed and one cannot invest directly in an index. Past performance does not guarantee future results.

Match maturities to objectivesThe choice between ultra-short, short-term or floating rate bonds depends on your holding period and investment objectives. For a very short-term holding period, consider sticking to high-quality ultra-short maturities, such as less than one year. If you have a longer holding period (over 12 months), short-maturity fixed-rate bond ETFs can provide more income potential during rising rate periods if you can tolerate the price changes over the period.

Exchange traded funds like iShares Short Treasury Bond ETF (SHV), iShares 13 Year Treasury Bond ETF (SHY) and iShares Short-term Corporate Bond ETF (IGSB) can provide investment options for those looking for exposure to short-maturity bonds.Karen Schenone, CFA, is a Fixed Income Product Strategist within BlackRocks Global Fixed Income Group and a regular contributor to The Blog. Carefully consider the Funds investment objectives, risk factors, and charges and expenses before investing.

This and other information can be found in the Funds prospectuses or, if available, the summary prospectuses which may be obtained by visiting or Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.Fixed income risks include interest-rate and credit risk.

Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates.

The Funds income may decline when interest rates fall because most of the debt instruments held by the Fund will have floating or variable rates. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency and its return and yield will fluctuate with market conditions.When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds.

Buying and selling shares of iShares Funds will result in brokerage commissions. Diversification and asset allocation may not protect against market risk or loss of principal.There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders.An investment in fixed income funds is not equivalent to and involves risks not associated with an investment in cash.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, BlackRock). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays or Bloomberg Finance L.P.

, nor do these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

The opinions expressed are as of July 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents.

This post may contain forward-looking information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass.

Reliance upon information in this post is at the sole discretion of the reader.2018 BlackRock. iSHARES and BLACKROCK are registered trademarks of BlackRock.

All other marks are the property of their respective owners.ICR0818U-5520451828536Originally published at on August 28, 2018 RELATED QUESTION What's the meaning of Sia's Chandelier song? Before Chandelier, Sia was a singer with mediocre success.

She was really struggling to push her career when she lost her partner to an accident. She got addicted to drugs, suffered depression and even wrote a suicide note. Drugs and alcohol were her only coping mechanisms.

This song is about the time she was addicted to alcohol and drugs and her struggle to get out of it. In an interview, Sia said that she always knew she was a drinker and that she must stop, her guilt, shame is what the following lyrics suggest:- Sun is up, I'm a mess Gotta get out now, gotta run from this Here comes the shame, here comes the shame . but, out of peer pressure phones blowing up, they're ringing my door bells, I feel the love .

she did not stop. 1,2,3 . 1,2,3 drink throw them back till I lose count The only time she could escape from reality was when she was high, under the influence of alcohol and drugs.

She could be carefree, live like tomorrow didn't exist. I'm gonna swing from the chandelier, from the chandelier I'm gonna live like tomorrow doesn't exist Like it doesn't exist I'm gonna fly like a bird through the night Chandelier is ultimately a brutally honest tale of substance abuse. Sia wrote the song for Rihanna but I am so glad that she kept this one for herself.

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