Investment-grade bonds with maturities of less than three and a half years seek to deliver attractive returns with low volatility. But these “limited-term” bonds can also act as a stabilizing force in fixed-income portfolios by lessening the impact of rising interest rates.
Holding a portfolio of medium and long-term bonds made sense when interest rates were falling. But rates have been near their historical lows for a while now-and may have nowhere to go but up. Even a small rise in interest rates could have a big impact on bond portfolios. Investors can help reduce the duration of their portfolios and seek to smooth out returns with a higher allocation to limited-term bonds. The average limited-term bond has an average duration that is significantly less than treasuries.1
Limited-term bonds have proven to be one of the least volatile assets over the past 20 years, with lower peak-to-trough declines than other bond sectors. Their returns are also much less volatile than intermediate-term bonds, senior loans, and high yield debt.1
To limit its exposure to rising interest rates, Oppenheimer Limited Term Bond Fund typically invests in investment-grade sectors with an average portfolio duration of between 1 and 3.5 years. The Fund typically consists of a mix of corporate, Treasury, agency and mortgage securities and is designed to generate stable performance across many market environments.
1 Source: Factset, Credit Suisse, Bloomberg and Barclays, as of 3/31/16. Asset class representations and index definitions can be found below. Past performance does not guarantee future results.↩
Duration: A measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates. Duration is expressed as a number of years.
Short-Term Bonds are represented by the Barclays U.S. Aggregate (1-3 Year) Index. The Barclays U.S. Aggregate (1-3 Year) Index is an unmanaged index of publicly issued investment-grade corporate, U.S. Treasury and government agency securities with remaining maturities of one to three years. Intermediate-Term Bonds are represented by the Barclays U.S. Aggregate Index. The Barclays U.S. Aggregate Index is an unmanaged index of publicly issued investment-grade corporate, U.S. Treasury and government agency securities. Senior Loans are represented by the Credit Suisse Leveraged Loan Index. The Credit Suisse Leveraged Loan Index is a composite index of senior loan returns representing an unleveraged investment in senior loans that is broadly based across the spectrum of senior loans and includes reinvestment of income (to represent real assets). High Yield Bonds are represented by the Bank of America Merrill Lynch High Yield Index. The Bank of America Merrill Lynch High Yield Index is an unmanaged index of the broad high yield market of corporate bonds. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict performance of any particular investment.
Special Risks: Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and the Fund’s share prices can fall. May invest up to 35% in below-investment-grade (“high yield” or “junk”) bonds, which are more at risk of default and are subject to liquidity risk. Asset-backed securities are subject to prepayment risk. Mortgage-backed securities are subject to prepayment risk. Mortgage bonds are susceptible to risks such as default and prepayment of principal and are taxable at the state and federal levels. The timely payment of interest and principal on U.S. Treasury securities is guaranteed by the U.S. Government and interest in those securities is only taxable at the federal level. The government guarantee does not eliminate market risk, however, because it does not cover any decrease in the market value of U.S. treasury securities. It is important to note that longer maturity bonds have greater volatility and risk when compared to shorter maturity bonds. Derivative instruments, whose values depend on the performance of an underlying security, asset, interest rate, index or currency, entail potentially higher volatility and risk of loss compared to traditional stock or bond investments. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Emerging and developing market investments may be especially volatile.
Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict performance of any investment. These views are subject to change based on subsequent developments.