CONTRIBUTORS
Joanne Driscoll, CFA
Head of Short-Term Liquid Markets
Franklin Templeton Fixed Income
Kevin Calabro
VP, Senior Product Specialist
Franklin Templeton Fixed Income
Reason #1: Short-duration fixed income has delivered attractive long-term, risk-adjusted returns
From January 1978 through June 2025, as seen in the first chart, short-duration fixed income has delivered similar long-term annualized returns to well-known fixed income benchmarks, but with substantially less volatility (standard deviation), resulting in higher long-term, risk-adjusted returns (Sharpe Ratio). In our analysis, this makes it an appealing option for investors seeking stability and consistent performance over time. As a result, we find investors may want to consider incorporating short duration as a structural allocation into a diversified fixed income portfolio. Furthermore, we believe the lower volatility associated with short-duration fixed income can help reduce the overall risk of the portfolio, making it a prudent choice for risk-averse investors.
Short-Duration Fixed Income Can Have Attractive Returns
January 1978–June 2025
Percent
Sources: ICE BofA, Bloomberg. Analysis by Franklin Templeton Fixed Income Research. As of June 30, 2025. The ICE BofA 1–3-year US Corporate Index represents the performance of the US dollar-denominated investment-grade corporate debt publicly issued in the US domestic market with remaining maturities between one and three years. The Bloomberg US Aggregate Bond Index is a broad, market-weighted benchmark that tracks the performance of the investment-grade, US dollar-denominated, fixed-rate taxable bond market. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
Reason #2: Short duration is set up to potentially perform well in various interest-rate scenarios
The second chart illustrates three hypothetical interest-rate scenarios: interest rates move lower by 0.75%, interest rates remain unchanged and interest rates move higher by 0.75%. With attractive yields and less interest-rate sensitivity, short duration is positioned to deliver greater return consistency versus core fixed income under these different interest-rate scenarios. As a result, we believe owning short-duration fixed income can provide an attractive risk/return tradeoff for investors who remain uncertain about the direction of US Federal Reserve (Fed) policy, inflation impacts as a result of tariff negotiations, and fiscal dynamics in the United States. Overall, we believe short-duration fixed income is an attractive option for investors looking to mitigate the interest-rate volatility in their portfolios.
Hypothetical One-Year Returns
As of June 30, 2025
Percent
Sources: ICE BofA, Bloomberg. Analysis by Franklin Templeton Fixed Income Research. As of June 30, 2025. Forward returns are based on the interest-rate representative indexes as of June 30, 2025. Estimated returns are calculated using a sample bond with the yield and duration of the representative indexes. One-year holding period assumes starting yield is earned in income over the course of the year, and price impact is (change in yield)*(effective duration). Indexes are unmanaged and one cannot directly invest in them. Performance data quoted represents estimated performance, which does not guarantee future results. Estimated performance results are inherently limited and should not be relied upon as indicators of future performance. The estimated returns benefit from the use of hindsight, do not represent actual recommendations or trading and may not reflect material economic and market factors. The results presented should not be considered a substitute for the investment performance of an actual portfolio. No representation is made that any account will or is likely to achieve returns similar to those presented and there is a possibility of a loss. The estimated returns are unaudited. Past performance is not indicative of future results; current estimated performance may differ from that shown in this presentation. The results do not represent actual results. Actual results may significantly differ from the estimated returns being presented.
Reason #3: Short-duration yields appear attractive relative to cash-like options and core fixed income
Investors can capture higher yields in short-duration relative to “cash”-like investments, such as money market funds and short-term Treasuries, as seen in the third chart. We believe this yield advantage may continue to increase moving forward due to Fed policy, changing yield curve dynamics and reform-driven impacts on money market funds. We believe this makes short duration a compelling choice for investors looking to maximize returns while maintaining a focus on capital preservation and liquidity. Furthermore, short duration offers yields in-line with longer-duration fixed income that are inherently more volatile.
Short-Duration Fixed Income Appears Attractive Relative to Other Options
As of June 30, 2025
Percent
Sources: Crane data, Bloomberg, US Treasury. Analysis by Franklin Templeton Fixed Income Research. As of June 30, 2025. 6-month Treasury bill and 2-year Treasury note are based on the Daily Treasury Par Yield Curve Rates, US Treasury Department. Past performance is not an indicator or a guarantee of future performance. The Crane Money Fund Index measures the average yield of the 100 largest taxable money market funds. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
WF: 6230808