Investors pile into short-term bond funds Fixed-income investors are piling into short-term bond funds and dumping longer-term debt, to shield their portfolios from the worst of a market rout as interest rates rise. The move is a sharp reversal from the past year, when investors piled into longer-dated debt to capture the higher yield and companies sold record amounts of long-term bonds. US investors have put $5.2bn into short-term bond funds since the start of May, at the same time as pulling $3.1bn from intermediate and long-term funds, according to data firm EPFR Global. Worldwide, the inflows into short-term funds have totalled $8.6bn, while $2.2bn has come out of funds dedicated to longer-maturity bonds. Longer-term bonds typically sell off most sharply as market rates rise, as they have done since it became clear the US Federal Reserve would soon begin to slow its purchases of Treasury and government-backed mortgage bonds. "For the last few years we did not really see many investors in corporate debt hedging their duration," said Chris McReynolds, head of US Treasury trading at Barclays. But now a lot of people want out of the duration risk in fixed-income that they weren't necessarily aware they had. Duration is a measure of how sensitive bond prices are to changes in interest rates, which takes into account maturities and interest payments. The lower its duration, the less a bond's price may fall if rates rise. Longer dated maturities typically have longer duration. The upheaval in the bond market can be seen in two large exchange traded funds run by Vanguard. Its intermediate-term bond ETF has fallen 6.5 per cent since the start of May and investors have pulled out $39m; its short-term bond ETF is down just 1.4 per cent and has accumulated $556m in new assets. Dirk Hofschire, senior vice-president of asset allocation at Fidelity Investments, said a rush into short-term debt could be short sighted. There is an "opportunity cost" to buying only short-dated bonds. The Fed has promised to keep short-term rates exceptionally low, even as it tapers longer-term bond purchases. "Investors are giving up a lot of potential return," Mr Hofschire said. There are better valuations than there were two months ago. However, the turnround in bonds "definitely changes the way you think about products that have a lot of interest-rate sensitivity," said Rick Rieder, co-head of Americas fixed income at BlackRock. Mr Rieder said one strategy to minimise rate sensitivity in fixed-income portfolios was to move to floating-rate debt, loans, portions of the commercial mortgage market and to assets from regions such as Europe, where monetary policy could stay loose for longer. As a rule of thumb, a fund with a duration of 10 years could see a 10 per cent drop in value of its holdings for each 1 per cent rise in rates.