WSJ: Short-Term Bond Funds Offer Alternative to Money-Market Funds

With short-term interest rates stuck at record lows — many money market funds yield only 0.01 percent — where should investors stick their cash?

One alternative is short-term bond funds. They have averaged an annual return of 3 percent over the last decade, compared to 1.4 percent for money-market funds, according to Morningstar,

Of course, bond funds are riskier. If interest rates rise, the value of the bond funds will fall, though probably not as much as long-term bond funds.

“Short-term bond funds are for someone who wants to have a little more yield, but is willing to take on more risk,” Christopher Philips, a senior analyst at Vanguard Group, told The Journal.

Then there are online savings accounts offered by Ally Bank, American Express, CIT Bank and others. These accounts pay interest rates of about 1 percent and are FDIC-guaranteed. A list of them can be found on Bankrate.

Certificates of deposit, also FDIC-insured, can yield 1.3 percent for one year and 2.25 percent for five years. They too are listed on Bankrate.

Meanwhile, the global economy is beginning to show stronger-than-expected growth, and that’s bad news for bonds, says Bill Blain, senior fixed income strategist at Mint Partners, a unit of BGC Partners.

“As a bond man, I’ve got to say get out of bonds and into stocks, and believe me that was a painful thing to say,”

Blain expects growth to heat up in Europe, the United States and China. “We’re going to see a global GDP surprise.” That’s when stocks really rise, Blain said.

The U.S. economy grew 2.4 percent last year, and many analysts expect an expansion of about 3 percent this year.

Meanwhile, the U.S. bond market already has slumped in recent sessions, with the 10-year Treasury yield now at 2.13 percent, up from a 20-month low of 1.65 percent just three weeks ago.

“It very much looks to me that bonds are fully priced. We have something like 40 percent of the developed world’s bonds trading with negative yields,” Blain said. “Why would you want to invest in negative yields in the credit market?”

The 10-year German government bond now yields 0.36 percent and Japan‘s 0.38 percent.